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Some firms are not wanted in the city and itv (LSE: ITV) seems to be one of them. ITV’s annual dividend was increased this week to 5 pence per share, meaning the yield is around 5.7%. On Thursday, when that positive but expected news was announced, shares fell in response.
While ITV’s share price is 8% higher than a year ago, at the time it had just plummeted after an annual report presentation hit the city like a lead bomb. So, the shares are still 30% cheaper than last February.
I have been buying, adding more ITV shares to my portfolio in the last week, before the results.
dividend increase
The final pay at the company was the same as the previous year, 3.3 pence per share. But last year saw the return of an interim dividend, meaning the total dividend grew. Management had guided a minimum annual dividend of 5p a share and that’s what they delivered.
With earnings per share of 10.7p, the ITV dividend was comfortably covered. Adjusted free cash flow at the company fell sharply, from £407m the year before to £280m this time around. As dividends cost around £200m, they are still covered by adjusted free cash flow as well as earnings.
The company’s policy is to pay ordinary dividends that “grow over time while balancing additional investments to support our strategy”. In other words, don’t anticipate a dividend cut (although that’s always a possibility in any company). If funds allow after spending on business activities like the launch of its streaming service, the company can also increase the annual payment, but not necessarily every year. Still, I already find the 5.7% dividend yield attractive.
strong business
Attractive performance is one thing, but I’m always more interested in the underlying business performance. After all, that’s what will help finance future ITV dividends.
The company’s external revenue increased 8% year-on-year to £3.7bn. Under bill, pre-tax profit increased 4% to £501m, while adjusted pre-tax profit was 13% lower than the previous year.
That pre-tax profit figure of around £500m is interesting to me. ITV’s market capitalization right now is £3.5bn. That means the business is operating on a price-earnings ratio of just 7. That sounds cheap to me, which is why I’ve been buying.
Despite concerns about a drop in advertising, ITV continues to do well in this regard. Its total ad revenue showed just a 1% annual decline last year. A growing streaming offering could help boost revenue and profit as viewers move away from traditional analog TV. On top of that, the production side of the business continues to benefit from the high demand for original scripted content.
I am buying
That could change. The spending spree seen in recent years by commissioners like Netflix could fall. Advertising revenue could decrease. Another risk I see is net debt. It rose 34% to £623m. Debt service can affect earnings.
I think such risks are more than valued in stocks. The dividend seems pretty safe to me. The performance is attractive. I see ITV as a quality business with an attractive valuation. So I have been increasing my participation.
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