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Is it time to buy Myer?

Two years after its float, shares of Australia’s largest department store chain, Myer (ASX: MYR), are trading around $2.05, or just about half the $4.10 issue price, and the company’s initial investors are likely disappointed.

Yet it’s possible that today’s price — a virtual half-off sale! — may offer an opportunity to savvy investors buying shares now and holding for the long term. The following three signs indicate that, at this price, Myer could be a smart bet.

1. Valuation

First, Myer is trading at a relatively low valuation. Today’s share price reflects an underlying P/E ratio of about 9 and an enterprise value to sales ratio of just 0.6, the sort of multiples you’d expect to see with a business in long-term decline, rather than attached to one of Australia’s preeminent retailers.

Sure, the current consumer discretionary environment is a challenging one, and it’s not possible to say when the economic uncertainty will end. As The Wall Street Journal just reported, “Australian consumer confidence deteriorated in December,” just ahead of the all-important holiday selling season — which is crucial to Myer as well as to competitors like David Jones (ASX: DJS) and Specialty Fashion Group (ASX: SFH). Still, I’ll bet a retailer such as Myer, with a 100-year operating history, can likely endure a few more slow or even painful quarters.

2. A generous dividend

Cash-hungry investors take note: Myer looks to be offering a pretty wonderful dividend. Its full-year dividend for 2012 was 19 cents, giving the shares an 8.8% dividend yield, fully franked (or nearly 13% yield when you gross up to account for the tax benefit).

For investors thinking of picking up Myer shares soon, the company’s ability to cover this generous dividend is likely a foremost concern. Thus it’s important to look at the company’s payout ratio. Typically, if a payout ratio is over 100%, a company is paying out more in dividends than it brings in — an arrangement that can be unsustainable. In Myer’s case, the payout ratio is 90%. This suggests that Myer’s dividend is somewhat secure, though of course there can be no guarantees.

3. Possibility of future growth

Finally, the company has plans to eventually expand its store base to 80 or more stores from today’s base of 68 stores. Plus, management’s recent moves to focus more on exclusive brands and to exit white goods, gaming consoles, and the sale of CDs and DVDs in 2012 reflects its ability to focus on the long term. (Speaking for myself, the last time I bought a CD was 2008.)

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned here. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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