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2 big reasons STW Communications Group Ltd could be your best income stock in 2015

Investing is never easy and right now with many stocks trading on high price-to-earnings (PE) ratios it’s arguably as hard as ever. This makes it all the more exciting when, as an investor, you can identify an appealing opportunity.

Opportunities can appear in unlikely places

Many companies in the media industry have found themselves structurally challenged over the past decade. For example, look no further than leading newspaper companies such as Fairfax Media Limited (ASX: FXJ) or free-to-air television networks such as Seven West Media Ltd (ASX: SWM).

While advertising and marketing communications firm STW Communications Group Ltd. (ASX: SGN) has not been immune from ‘old world media challenges’, right now it looks like it could be an appealing opportunity for investors seeking out decent businesses with prospects for some growth and offering large, fully franked dividends.

Here are two reasons STW Communications could be an investment worth considering for your portfolio in 2015.

Undemanding Multiple – STW operates on a December financial year end. In the half year to June the company reported earnings per share growth of 1% to 4.97 cents per share (cps). With the shares trading at $1.15, on an annualised basis the FY 2014 PE is 11.5x. Given management is guiding towards “mid-single digit growth in earnings per share and net profit after tax for the full year ended 31 December 2014” the stock is potentially trading on a lower forward PE than the annualised rate would suggest.

High Yield – STW paid a fully franked interim dividend of 3.3 cps which was in line with the prior corresponding period. In FY 2013 a final dividend of 5.3 cps was paid. Assuming a steady pay-out in the current year, the stock is trading on a dividend yield of 7.5%.

Smash the cash rate

The beauty of buying a stock such as STW is that it already trades below the market multiple yet given its industry position it should be able to grow at a rate close to the market average. This situation should provide downside protection from a valuation perspective.

At the same time the stock’s yield is well above that paid not just on a deposit account but also compared with the market’s average yield.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.

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