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Why I’d buy the ITV share price and the FTSE 100 company’s fat dividend yield

I tapped out an article in November extolling the virtues of the ITV (LSE: ITV) share price and explained that I liked the broadcaster’s high dividend yield and the low valuation. The firm had gone ex-growth, but I believed that the valuation accounted for that and growth would likely return someday.

The good news is the share price has eased back a bit more since then and the valuation looks even more attractive. But I’d be the first to admit that the slide in the shares has been steady since as long ago as the beginning of 2016. I’ll also own up to believing that it’s dangerous to buy into a falling share price just because the valuation indicators look good. Indeed, valuations can change by means other than the shares going up. Sometimes — frequently in fact — earnings go down and dividends get cut, which sorts out valuation anomalies nicely. The trouble is, the side effect tends to be an escalation in the plunge of a share price, which is why it’s risky trying to catch a ‘falling knife.’

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Is this good value, or what?

So now that I’ve got that out of the way, let’s take a closer look at ITV today. The recent share price close to 132p throws up a forward price-to-earnings rating for 2020 of 8.5, and the forward-looking dividend yield is around 6.6%. City analysts following the company expect earnings to decline by 5% in 2019 and to rise around 9% in 2020. Those anticipated earnings should cover the dividend payment 1.8 times. It means that earnings will likely get back to a smidgeon below their 2017 level. If that happens, it seems likely the dividend will be retained because a cut is a big decision for directors of any company to take, and they generally don’t like doing it.

Operating cash flow has been holding up well and lends decent support to earnings. That gives me even more confidence in the dividend. The main threat would be some catastrophic plunge in the macroeconomy. If that happens, all bets are off because the dividend and the share price would likely be toast.

Decent quality metrics

I see another pillar of support in the robust-looking quality ratings the firm is producing. The return-on-capital figure is running around 27% and the operating margin at 17%, or so. However, there’s a red flag in the figure for net debt. Borrowings have been on the rise for a few years and stood at more than £1bn on the balance sheet released with the last half-year results in July. That’s more than twice the firm’s annual operating profit. But the interest on the debt is well covered by earnings and incoming cash flow, so I don’t think the debt will threaten the dividend payments – it’ll take a full-on economic slump to do that, I reckon.

There hasn’t been any meaningful news from the company since my last article, so nothing in particular seems to have caused the shares to drift lower. Meanwhile, the company is busy with cost-control measures and initiatives to restart proper growth. I still think ITV is worth buying for the dividend income and for holding on to see what happens over a five-year-plus timescale.

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Kevin Godbold has no position in any of the shares mentioned. 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.