FTSE250 terrestrial and digital media company ITV (LSE: ITV) seems seriously underrated to me. It also provides an annual dividend yield of over 6%, although this may go up or down.

In my opinion, this means that investors can secure a lot of passive income while waiting for any price enhance.

In my opinion, then, there are two key questions. First, what is the true value of the stock? Second, does the dividend yield look sustainable?

Fair value?

The best way I have found to determine the fair value of any stock is the discounted cash flow model. This indicates the price at which the stock should trade, based on cash flow forecasts for the core business.

In the case of ITV, this shows that the shares are 69% undervalued at their current price of 82p.

So their fair value is £2.65.

This is critical because the prices of all assets tend to reach their fair value over time. Therefore, it is in this price-value gap that investors can make immense long-term profits.

Sustainable dividends?

The dividend yield on a stock moves in the opposite direction to its price.

Last year ITV paid a total dividend of 5p. This gives a dividend yield of 6.1% at the current share price of 82p.

Analysts predict the payout will remain at that level this year, bringing in the same profit.

For 2026 and 2027, they forecast a slight decrease to 4.9p, which will give a dividend rate of 6%.

A key factor influencing price and dividends

The driving force behind any company’s stock prices and dividends over time is earnings growth. The main risk for ITV is the imbalance between the two main forces operating in the sector.

These include the continued decline in classic television advertising and the costs associated with the increased presence of digital media. If ITV is able to continue to grow in the latter segment to offset the former, its profits could fall.

However, analysts predict that by the end of 2027, the company’s profits will grow by an average annual rate of 6.3%.

Against this backdrop, the company’s 2024 results published on March 6 showed that the group’s adjusted earnings before interest, tax, depreciation and amortization increased by 11% year-on-year to £542 million. This was driven by record profits at ITV Studios and increased margins in the media and entertainment segment.

What’s more, ITVX’s digital offering saw a 12% enhance in viewership and a 15% enhance in digital advertising revenue. It also made £60 million in constant savings, £10 million ahead of plan.

Potential dividend income?

Investors considering having £20,000 in ITV would earn £16,752 in dividends after 10 years at a yield of 6.1%. This also includes the utilize of the “dividend cumulation” method.

On the same basis, payments will enhance to £104,101 after 30 years.

The total value of the package (including the initial investment of £20,000) would now be £124,101.

And this would provide an annual dividend income of £7,570 by then! But of course you can’t count on this, as dividend payments and company profits can fluctuate over such a long time horizon.

My view on the investment

I already own several high yielding stocks that also look very undervalued. So ITV isn’t for me right now, but I would consider it if any of the others stopped doing well.

With an undervaluation of 69% and a projected yield of 6.1%, I believe this is worth considering by other investors.