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

Some companies are not loved in the City and ITV (LSE: ITV) seems to be one of them. The annual dividend yield from ITV shares for this week was 5p per share, or 5.7%. On Thursday, when the positive news was announced, however, the stock fell in response.

While ITV’s share price is 8% higher than a year ago, at the time it only fell after the presentation of its annual report which dropped on the City like a lead bomb. So the stock is still 30% lower than last February.

I had bought, adding another ITV share to my portfolio last week, before the results.

Increase the dividend

The final payout at the company was the same as the previous year, at 3.3p per share. But last year, the interim dividend yielded a profit, meaning the total dividend increased. Management has guided to a minimum 5p per share annual dividend and the same is being delivered.

With earnings per share of 10.7p, ITV’s dividend is comfortably protected. Adjusted free cash flow at the company fell sharply, from £407m the year before to £280m this time. With dividends worth around £200m, they remain protected by adjusted free cash flow as well as earnings.

The company’s policy is to pay a regular dividend that “grow over time while balancing further investments to support our strategy“. In other words, it does not foresee a dividend cut (although that is always a possibility in any company). If funds allow after spending on business activities like the launch of a streaming service, the company can also increase the annual payment – but not necessarily every year. Still, I already consider the 5.7% dividend yield to be attractive.

Business is strong

An attractive yield is one thing, but I’m always more interested in the underlying business performance. After all, this is what will help fund ITV’s future 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 previous year.

That pre-tax profit number of around half a billion pounds is interesting to me. ITV’s current market capitalization is equal to 3.5 billion. That means the business is trading at a price-to-earnings ratio of just 7. That seems cheap to me, so I’ve bought it.

Despite concerns about the decline in advertising, ITV has been positive about it. The total advertising revenue showed only a 1% annual decline last year. The growing number of streaming offerings could help increase revenues and profits, as viewers shift away from traditional analog television. On top of that, the production side of the business continues to benefit from high demand for original scripted content.

I bought it

That can change. A spending spree is seen in the new year from commissioners such as Netflix can fall. Advertising revenue may decline. Another risk I see is net debt. It rose 34% to £623m. Debt servicing can be profitable.

I think the risk is more than the price of the shares. The dividend looks pretty safe to me. Attractive yield. I see ITV as a quality business at an attractive price. So I have increased the holding.