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With a 5.7% ITV dividend yield, I’m buying!

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Some firms are unloved in the City and ITV (LSE: ITV) seems to be one of them. The annual ITV dividend was increased this week to 5p per share, meaning the yield is around 5.7%. On Thursday, when that positive albeit expected news was announced, the shares drifted down in response.

While the ITV share price is 8% higher than a year ago, at that point it had just plummeted following an annual report presentation that went down in the City like a lead bomb. So the shares are still 30% cheaper than they were last February.

I have been buying, adding more ITV shares to my portfolio in the past week, prior to the results.

Dividend increase

The final payout at the company was the same as the prior year, 3.3p per share. But last year saw the return of an interim dividend to boot, meaning the total dividend grew. Management had guided to a minimum 5p per share annual dividend and that is what they delivered.

With earnings per share of 10.7p, the ITV dividend was comfortably covered. Adjusted free cash flow at the firm fell sharply, from £407m the prior year to £280m this time around. With the dividends costing around £200m, they remain covered by adjusted free cash flow as well as earnings.

The company’s policy is to pay ordinary dividends that “grow over time whilst balancing further investment to support our strategy”. In other words, it does not foresee a dividend cut (although that is always a possibility at any company). If funds allow after spending on business activities like its streaming service launch, the company may also increase the annual payout – but not necessarily every year. Still, I already regard the 5.7% dividend yield as attractive.

Strong business

An attractive yield is one thing, but I am always more interested in the underlying business performance. After all, that is what will help fund future ITV dividends.

The company’s external revenue rose 8% year-on-year to £3.7bn. On a statutory basis, profit before tax rose 4% to £501m, while adjusted profit before tax was 13% lower than the prior year.

That pre-tax profit number of around half a billion pounds is interesting to me. The market capitalisation of ITV at the moment is £3.5bn. That means the business trades on a price-to-earnings ratio of just 7. That looks cheap to me, which is why I have been buying.

Despite concerns about an advertising downturn, ITV continues to do well in this regard. Its total advertising revenue showed only a 1% annual decline last year. A growing streaming offer could help boost revenues and profits, as viewers switch away from traditional analogue television. On top of that, the production side of the business continues to benefit from high demand for original scripted content.

I’m buying

That could change. The spending spree seen in recent years from commissioners such as Netflix may fall. Advertising revenues could decline. Another risk I see is net debt. It rose 34% to £623m. Servicing debt can eat into profits.

I think such risks are more than priced into the shares. The dividend looks fairly safe to me. The yield is attractive. I see ITV as a quality business with an attractive valuation. So I have been increasing my holding.

The post With a 5.7% ITV dividend yield, I’m buying! appeared first on The Motley Fool UK.

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C Ruane has positions in ITV. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.