Why I just bought ITV shares for the 4.7% dividend yield

Aviva dividend

In September, I added one stock to my personal dividend portfolio. That stock was ITV (LON: ITV) (ITV.L). Here’s why I bought in.

Poor sentiment

Sentiment towards companies that generate their revenues from advertising is low right now. That’s pretty clear. Just look at the share price decline of WPP (another stock I bought recently).

Furthermore, some investors probably have concerns that services such as Netflix are going to destroy the profitability of the traditional broadcasters. That’s a valid concern – I watch a few shows on Netflix myself. However, I also know that my wife watches Good Morning Britain every single morning, and that pretty much everyone I know was hooked on this summer’s series of Love Island. We’ve also got the World Cup coming up next year. So I don’t think traditional television is completely dead yet.

It’s also worth noting that ITV now generates over 50% of its revenues from sources other than spot advertising. The company is focusing on growing is content division, and this area of the business performed well last year, with revenue rising 13%. As they say – content is king. So I’m viewing the recent poor sentiment towards ITV as an opportunity.

Strong dividend growth

Looking at the table below, we can see that dividend growth has been strong in recent years. Indeed, over the last three years ITV paid out regular dividends of 4.7p, 6.0p and 7.2p. On top of the regular dividends, ITV also paid ‘special’ dividends of 6.3p, 10.0p and 5.0p as well. Dividend coverage has been healthy in this time too, suggesting there’s little reason to think a dividend cut might be on the horizon.

ITV dividend

Source: Hargreaves Lansdown

While recent H1 results were not great, with revenue and adjusted earnings per share falling 3% and 9% respectively, ITV said that it was “confident in the underlying strength of the business” and hiked the interim dividend by another 5%. City analysts expect a full year FY2017 dividend payout of 8.24p at present, a yield of 4.7% at the current share price.

Low valuation, high yield

ITV’s share price has fallen from above 265p at the end of 2015, to around 155p in recent weeks, a significant decline. The share price has bounced a little today on the back of an upgrade from Barclays Capital.

At the current share price of 175p, the stock trades on a forward looking P/E ratio of just 11.2, with a prospective yield of 4.7%, if City analysts’ forecasts are accurate. Those metrics look attractive in my view, hence I’ve added ITV to my portfolio and I look forward to my first dividend payment on 27th November.

Disclosure: Edward Sheldon, CFA owns shares in ITV and WPP.  

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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