Should I Invest in ITV?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at ITV (ITV -0.21%), which is one of the UK's terrestrial television broadcasting companies.

With the shares at 117 pence, ITV's market cap. is 4,558 million pounds.

This table summarizes the company's recent financial record:

Year to December.

Although ITV is the largest commercial television network in the U.K., its business has been under threat for some time. The onset of the digital age caused a long-term down trend in viewer numbers that began in the early 1990s. Customers migrated to other services like satellite TV and Internet, taking revenue with them, and advertisers shifted to chase their audiences. As the company relied mainly on advertising revenues, it was a serious matter, which came into clear focus with the sharpest advertising downturn on record in the wake of the credit crunch.

At that point, ITV took decisive action by launching its five-year transformation program, now three years along, which saw a focus on cost-cutting and targeted investment to up its game creatively. The aim is to deliver higher quality programming to win back market share. In parallel with that, the company accepted the inevitability of digital media's disruptive onslaught, by embracing it. The firm is working on ways to participate in the digital revolution and to reduce its traditional dependence on free-to-view content.

There's evidence that the strategy is working. Viewer numbers have increased recently, along with revenue and profits, and the firm is winning advertising market share in an otherwise flat advertising market. You can see the financial results of ITV's turnaround in the table, where the restoration of a dividend is a particularly welcome feature. If ITV can maintain its turnaround and move forward to drive new revenue streams by exploiting its content across multiple platforms, as it hopes, the prospects for investor total return look promising.

ITV's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

1. Dividend cover: adjusted earnings covered last year's dividend almost five times. 5/5

2. Borrowings: at the last count, there was net cash on the balance sheet. 5/5

3. Growth: revenue, earnings per share and cash flow have all been growing lately. 5/5

4. Price to earnings: a forward 11.6 looks full compared to growth and yield forecasts. 2/5

5. Outlook: satisfactory recent trading and a cautiously positive outlook. 4/5

Overall, I score ITV 21 out of 25, which suggests the company has potential to outperform the wider market's total return going forward.

Foolish summary
ITV is performing well on cash generation and has managed to turn its debt position into one of net cash according to recent director guidance. The recently restored dividend has been set at a level well covered by rising earnings. This all leads to high scoring with the first three business quality indicators. On valuation, the shares look up with events, to me, which leads to a lower score on the P/E indicator.

The shares have had a good run so, although the business is performing well, I'd rather put ITV on my watchlist than invest right now.

Generally, I'm more likely to buy shares when a company hits a spot of bother, as that's often when I find bargains. Investors tend to like bargains as share-price recovery from low levels can lead to enhanced total returns. Right now, on one selection I find myself in the company of master investor Warren Buffett. In fact, the share in question is the only publicly listed U.K. company in which the American financial wizard holds shares. You can find out why in the Motley Fool's report: "The One U.K. Share That Warren Buffett Loves." For a limited period, the report is free, so to download your copy and find out the identity of the one U.K. share that screams "buy" to so many, click here.

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