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IT'S hard to escape the omnipresence of the media sector. From the content we read to the TV we stream, plus the host of adverts lodged in between, the industry offers up plenty of opportunities for savvy stock pickers to choose from.

Here we take a look at how you can invest in UK stocks.

Staying relevant

Key to understanding the media investment landscape is recognising the impact of digital advances. Traditional media companies, built to feed the consumption habits of a previous generation, may now find themselves swimming against the current in the struggle to keep their models relevant.

Here in the UK, ITV is perhaps the most recognisable media stock trying to keep up with the times. Its ‘More than TV’ strategy has seen the company put greater emphasis on content production alongside its traditional role as a TV channel, with the latter looking increasingly out of step with people’s current viewing habits. The launch of BritBox in 2019 represents the company’s efforts to tap directly into the booming streaming market, currently dominated by US giants like Netflix and Disney.

These are encouraging steps forward, but it was hard to ignore the vulnerability of ITV’s position during the height of the pandemic last year.

The company hit the headlines for dropping out of the FTSE 100 in 2020, marking a serious decline in fortunes for one of the UK’s most recognisable brands. Advertising revenues dried up (more on those later) while production ground to a halt at its production arm, ITV Studios.

The hardships ITV faced in those early months contrasted cruelly with soaring share prices in rivals like Netflix, which grabbed the headlines as demand for streaming services shot upwards.

Ultimately, however, the pandemic proved to be a blip rather than a death knell. ITV has since regained its spot on the UK’s blue-chip index as advertising revenues have improved. Its dividend, cancelled in the midst of last year’s volatility, is due to return with a full-year payout at the end of this financial year.

Much now rests on ITV’s capacity to make build on this positive momentum and continue its transition towards becoming a more digitally-orientated company.

If ITV is an example of a large company looking to adapt to shifting consumption habits, Future plc is one that finds itself far more on the front foot. The publishing company is benefitting from an aggressive growth strategy that has kept its digital content offering nice and relevant.

The FTSE 250 company underwent a major restructuring in 2014 to turn around what was then a failing magazine publishing business. Since then, it’s enjoyed a bumper few years. A number of savvy acquisitions have seen the company not only consolidate its position but record some impressive growth too.

The company now owns more than 80 brands, including names such Marie Claire and (as of last year) Go Compare.

Future is an exciting growth stock, but there are risks attached to its strategy.

An acquisitive company naturally arouses suspicion, especially one that’s been as busy as Future. The company spent more than £1.1 billion on acquisitions between 2015 and the end of 2020.

When done well, acquisitions can help fuel growth, but they’re usually funded by debt that can create issues further down the line. Future’s strategy is working now, but investors would be wise to keep an eye on its balance sheet.

Switching off during the ad break

Among other things, media companies make money through subscriptions, events, premium content, and, most importantly, advertising.

Because many companies see advertising as an expendable cost through periods of economic hardship, a reliance on advertising for revenues makes media a relatively cyclical sector - that is, it’s fortunes are often tied to the broader health of the economy.

Unsurprising, then, that the pandemic left a sizeable dent on many media company’s balance sheets. WPP, the world’s biggest advertising group, fared particularly poorly. Operating profits at the FTSE 100 stalwart fell from £1.3 billion in 2019 to a £2.3 billion loss in 2020.

Things have improved since. Revenues have returned to pre-pandemic levels a year earlier than expected thanks to global marketing spend rebounding at breakneck pace. Underlying revenue for the second quarter of 2021 increased by 19.3%, a record rate of growth for the company.

The nature of WPP’s recovery underscores some of the ways in which the media industry is changing. Much of its growth has been fuelled by a recovery in digital media, with traditional channels recovering more slowly.

In its latest set of results, WPP pointed to research which showed that digital ad spend was set to grow at the fastest rate this year, with television also set to rise. Spending on magazines and newspapers, by contrast, was set to decline. 

The task now for WPP is to adapt to these shifts. Last year it announced plans to expand areas of commerce, experience and technology, to provide 40% of its business by 2025, up from 25% at the time.

Along with ambitious growth targets, WPP has plans to reward its shareholders. It intends to buy back £350 million worth of shares in the second half of 2021, having already bought back £250 million earlier this year. It’s also raised its interim dividend payment to 12.5p per share.

These are encouraging signs, but it remains to be seen how well the company can deliver. Recent accusations of bribery at some overseas subsidiaries certainly won’t help WPP as it looks to regain its footing in this competitive landscape.

Growth in unexpected places

Growth in the media sector isn’t limited to streaming or advertising though. Pearson, for example, provides educational products to governments, companies, employers and individuals. It’s a wide offering, ranging from content to digital services, all designed to capitalise on surging demand for digital education solutions.

It may not seem like a high growth area, but the market for learning is following the established pattens of more conventional forms of media. Everywhere you look, habits are changing and companies are looking to plug the holes in demand.

All this makes media an exciting area of the market for stock pickers to explore. It certainly comes with risks, and companies that fail to keep apace are likely to be punished, but there’s plenty here to admire.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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