The recent slump in the share price of advertising company STW Communications Group Ltd. (ASX: SGN) means that the shares are now trading on a trailing dividend yield of 10%. As the dividends are fully franked, this provides a grossed up yield of 14.3%.
Is this a screaming buy opportunity for investors faced with record low interest rates or are there other factors at play here?
STW's share price has fallen over 50% from its 52-week high of $1.53 to its 10 March closing price of $0.68. STW faces significant headwinds in a market where clients are spending more and more of their marketing budgets on digital and owned channels than on the traditional focus areas of STW in television, radio and print.
For STW, this has resulted in a decline in earnings per share, an increase in debt levels and a market the company describes as "very challenging". This challenging market will limit the opportunities for share price appreciation for investors in the short to medium term and will likely continue to affect operating margins for the company.
At this price, shares in STW are trading on a P/E ratio of only 6.1. This indicates that investors lack confidence in the company's ability to maintain profits over the longer term. With management forecasting low single-digit growth in earnings over the coming year, however, all current negative news seems to have been priced into the shares.
As part of its recent earnings announcement, STW slashed its total dividend from 8.6 cents per share in 2013 to 6.8 cents per share in 2014. So investors may ask whether the company will cut the dividend again. STW paid out 60% of its profits as dividends in 2014 and has a stated policy of maintaining a payout ratio of 60% to 70%. Assuming the company is able to meet management's forecasts for the coming year, the current dividend should be relatively safe for 2015.
Beyond that, given the difficulties in the advertising industry environment, the current yield is far from guaranteed. However, if the company's efforts to future-proof earnings by investing in digital, data, international expansion and smart acquisitions are successful, buying shares in STW group now could be a shrewd investment with dividends that provide a high level of regular income.
