There are only a handful of stocks in the FTSE 100 that currently support dividend yields of 6%, or more. One of these companies is the broadcaster ITV (LSE: ITV).
Shares in ITV have come under pressure over the past few months due to concerns about the company’s ability to compete in the increasingly competitive online streaming environment.
Streaming giants in the US are ploughing tens of billions of dollars into producing content. ITV just can’t compete. In 2019 alone, Netflix spent a total of $14bn creating content. By comparison, ITV’s market capitalisation at the time of writing is just $7bn.
These figures suggest the company has absolutely no chance of competing with the American giant.
However, the UK-based group does have some strengths. For example, the Rugby World Cup helped to lift ITV’s advertising revenues in the third quarter.
What’s more, ITV is the country’s largest free-to-air commercial broadcaster. This makes the business dependent on advertising revenue, which can be lumpy, but it also means the service is more accessible to consumers.
Holding its own
Despite its size, ITV isn’t doing too badly. Advertising revenues rose by around 1% in the third quarter of 2019. Management expects it to be either flat, or 1% higher, in the final quarter.
At the same time, the company is investing millions in building out its production business — this is where the value is.
ITV Studios produces content for its parent station as well as other networks around the world. There are 60 different production labels under the ITV umbrella, giving the company a foothold in global media markets. Many of these programmes eventually go on to be shown on one of the streaming platforms.
Another prong of ITV’s fightback is the recent launch with the BBC of its own streaming service, BritBox. This service already exists in the United States, so the company does have some experience managing an online streaming service. However, it’s unlikely this will become a significant part of the enterprise anytime soon, although it’s an extra source of income for the group.
Still, while growth across the group might not be as impressive as it once was, ITV’s core business remains profitable and highly cash generative. That’s great news for income seekers.
In its last financial year, the company reported a free cash flow of around £320m. That easily covered the £315m dividend cost.
As such, it seems as if investors can trust the company’s 5.9% dividend yield. On top of this, the stock is trading at a price-to-earnings (P/E) ratio of 10.2.
This suggests the stock offers a wide margin of safety at current levels. Indeed, most of the company’s international media peers command P/Es of 20 or more, implying the upside could be significant when sentiment towards ITV improves.
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Rupert Hargreaves owns shares in ITV. 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.