Is ITV the Ultimate Retirement Share?

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at one of the U.K.'s biggest television broadcasters, ITV (ITV -1.50%) (ITVP.Y 0.69%). After a very successful run recently, does it have the making of a retirement share?

ITV vs. FTSE 100
Let's start with a look at how ITV has performed against the FTSE 100 over the last 10 years:

Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

ITV's average annual total return over the last 10 years has been almost identical to that of the FTSE 100, despite its recent outperformance, which has been the result of its post-2008 turnaround plan.

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how ITV shapes up:

Five-year average financials

*Caused by a 2.7 billion pound goodwill impairment in 2008, when the dividend was also canceled for a year.

Here's how I've scored ITV on each of these criteria:

ITV's score of 17/25 shows that a few years of strong performance isn't enough to score highly as a retirement share -- companies with high scores have generally delivered many years of above-average performance, and often have much longer pedigrees than ITV.

To be fair, ITV is the result of a 2004 merger between regional broadcasters Carlton and Granada, both of which had been in business since the 1930s. ITV is also much leaner and more profitable than it was before 2008. Its recent full-year results showed that operating profits rose by 20% to 453 million pounds during 2012, thanks in part to a 1.7% rise in operating margins. ITV also rewarded shareholders with a special dividend of 4 pence and a 50% increase in the final dividend, providing a total 2012 dividend yield of 4.3%, at today's prices.

My main reservation with ITV is that it remains heavily dependent on advertising revenue, which remained flat last year. Unlike British Sky Broadcasting, ITV does not have the security of a large subscriber base to dilute the effect of a downturn in advertising revenue. Although the firm's results showed that non-advertising revenues rose to 1,036 million pounds -- 47% of total revenue -- in 2012, 712 million pounds of this came from ITV Studios, the company's in-house production arm. Much of ITV Studios' output is commissioned for ITV, which means it is paid for from ITV's advertising revenue.

For this reason, I believe that ITV would be more vulnerable to a fall in advertising revenues than its results suggest, and in my view, this is the main risk of investing in the company.

My verdict
Despite its dependence on advertising, I think that ITV could be a good retirement share, and would be worth comparing closely to BSkyB, if you would like to add a media share to your retirement portfolio.

ITV's forecast 2013 dividend yield of 2.6% is below the FTSE 100 average of 3.2%, but it should grow gradually over the longer term, and ITV's forward price-to-earnings ratio of 12.8 makes it look quite good value at present.

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