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Why I’d ignore the Barclays share price and buy this FTSE 100 dividend stock instead

At first glance, shares in Barclays (LSE: BARC), one of the largest lenders in the UK, look like a steal. Indeed, the bank is trading at only 50% of its tangible book value and a forward P/E of just 8.3 based on current City earnings forecasts.

But despite these attractive metrics, I’m not interested in the bank. I would rather buy shares in a more profitable and stable business.

Uncertain outlook

2018 was supposed to be the year of Barclays’ comeback. And the year started off well. At the beginning of August, the bank reported a pre-tax profit of £1.9bn for the second quarter of 2018, up from £659m a year ago.

Unfortunately, this headline figure is misleading because, as analysts were quick to point out. The bulk of the earnings growth came from lower impairment charges on bad loans, an accounting quirk that both management and analysts have since warned will not be sustainable. For the first six months of the year as a whole, the bank reported a net profit of £468m, compared with a loss of £1.2bn in the same period last year.

Considering Barclays’s mixed outlook, it is no surprise that the market has continued to avoid the shares over the past 12 months. Year-to-date the stock is down around 15%, and it is off 21% from its 52-week high.

And that low valuation? Well, historically, it has underperformed City expectations, so while analysts are expecting earnings per share (EPS) growth of 65% in 2018 and 10% for 2019, I’m sceptical that the company will meet this target.

With so much uncertainty surrounding the outlook for Barclays, I’m not interested in it, but one company that has attracted my interest is ITV (LSE: ITV).

Investing for the future

Unlike Barclays, it has turned out steady earnings growth for the past six years, achieving a 14% EPS compound annual growth rate. As well as this growth, there are no hidden nasties on the group’s balance sheet, such as exotic derivatives or defaulted loans that might have to be written off, such as what you get with Barclays.

ITV also trades at a discount valuation of just 10 times forward earnings at the time of writing  — the lowest valuation in five years. The stock’s dividend yield has spiked to 5.4%.

It seems the market is concerned about ITV’s growth strategy. The broadcaster recently unveiled a plan to invest more in content to help it to compete against the online streaming service giants. Acquisitions are expected to form a major part of the strategy. 

The risk with this strategy is that the company will become a spendthrift, throwing away investors’ cash without achieving the desired results. 

However, what I think the market is missing is the potential pay-off from this strategy. If ITV can become an international content platform then I reckon the shares could be worth multiples of their current price. The only way to get there is to spend money. 

It might mean lower shareholder returns in the short term, but I believe the company’s current strategy could be a long-term winner and today, you can buy part of this growth story for a historically low price.

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Rupert Hargreaves owns shares in ITV. The Motley Fool UK has recommended Barclays and 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.