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Myer Holdings Ltd and Seven West Media Ltd: Should you buy?

2014 has been a tough year for investors in Myer Holdings Ltd (ASX: MYR) and Seven West Media Ltd (ASX: SWM), with shares in the two companies falling by 11% and 21% respectively since the turn of the year. This is well below the ASX’s 5% rise. However, does this mean that the department store operator and television broadcaster and publisher are now great value and worth buying?

Income potential

The most obvious attraction of both companies – especially now their share prices have fallen – are their forward dividend yields. Indeed, Myer now offers a fat, fully franked yield of around 5.7%, while Seven West’s yield is even stronger at around 5.8% (also fully franked). Both of these yields are well ahead of the ASX’s 4.4%, which is a big plus for investors at a time when interest rates look set to remain at just 2.5% for a good while longer.

However the disappointment comes in terms of dividend per share growth. When Myer releases its results next week, analysts’ expectations are for it to announce a cut of 22% to its dividend, with Seven West’s dividends per share also forecast to fall in the current year by around 10%. Although the forward yields stated earlier take these expected cuts into account, it has caused market sentiment to weaken as many income-seeking investors have been put off by falling income levels.

Growth potential

Despite this, both companies are expected to increase dividends per share in the next financial year (in Myer’s case by 12% and in Seven West’s case by 24%). This could increase their appeal to income-seeking investors and cause sentiment to improve, which could have a positive impact on their share prices. Indeed, if dividend cuts have been to blame for share price falls this year, significant increases to dividends could have the opposite effect.

Valuation

Shares in both companies seem to offer good value for money at current price levels. For example, shares in Myer trade on a P/E ratio of just 14.6, while a price to sales ratio of 0.53 is also appealing. Meanwhile, Seven West has a P/E ratio of just 9.3 and a price to book ratio of only 0.64, which highlights just how cheap its shares have become.

Despite both companies being due to cut their present level of dividends per share, this appears to be a temporary setback. They are both forecast to increase dividends per share at a brisk pace next year, which could improve sentiment and allow for an increase in the two companies’ ratings. As such, both stocks could prove to be strong performers moving forward.

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Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned.

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