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Another FTSE 100 dividend stock yielding 6% at a rock-bottom price I’d buy

Shares in broadcaster ITV (LSE: ITV) have to be one of the most hated stocks in the FTSE 100 right now. The shares have been on a constant downtrend over the past 12 months, as investors have been switching off.

The bear argument is simple. Analysts believe the company is struggling to survive in the increasingly competitive broadcasting market, where well-funded American competitors such as Netflix and Amazon are spending tens of billions of dollars to try and entice customers to their platforms.

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This has had an impact on ITV. The company has struggled to find new revenue sources as consumers have shifted from traditional television to on-demand services. For example, live viewing of ITV’s TV and online channels fell 5% year-on-year to 8.2bn hours during the first half of 2019.

Taking action

The broadcaster is taking action to try and turn this performance around, although it will take time. Management is pursuing several initiatives to rekindle growth, such as the launch of BritBox, a subscription service it is launching in partnership with the BBC. ITV will be investing £65m over the next few years to develop this platform, including the production of unique programmes.

The group has also launched its ITV Hub+ ad-free streaming service. Subscribers have doubled over the past 12 months to half a million. These initiatives helped online revenues grow 18% year-on-year during the company’s first-half.

The firm is also trying to monetise its programmes through other methods including merchandising and licensing deals. These deals bought in £8m from just one show (Love Island, of course) in the first half of 2019. Success management wants to replicate this across its portfolio of programmes.

These initiatives are helping ITV weather the storm, but there’s still plenty of work to do before growth returns. Pre-tax profits in the first six months fell 16% to £222m. For the full-year, City analysts are forecasting 10% decline in earnings per share to 12.9p. The good news is that growth is expected to return in 2020. Earnings per share are currently forecast to jump nearly 4% next year.

Undervalued

The low valuation is the primary reason why I’m interested in ITV at current prices. Granted, the company does have a lot of problems, and it’s yet to prove that the growth initiatives will pull it out of the decline. However, the enterprise remains highly cash generative, and the low valuation offers a margin of safety for investors buying today.

Last year, ITV generated free cash flow per share of 8.5p, which gives a free cash flow yield of just under 7% at the current price. Most of the company’s peers trade at a free cash flow yield of around 3-5%, implying shares in ITV could double in value from current levels.

On top of this, the stock supports a dividend yield of 6.5%. The distribution is covered 1.6 times by earnings per share, so it looks as if it is safe for the time being.

That’s why I think shares in ITV could be a great addition to your portfolio today. The company looks deeply undervalued and offers a 6.5% dividend yield for investors who are willing to wait for the recovery.

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Rupert Hargreaves owns shares in ITV. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Netflix. 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.