Earlier in the year I looked at how likely it was that STW Communications Group Ltd. (ASX: SGN) would be able to achieve the 9% fully-franked dividend yield that the majority of analysts were predicting.
As it turns out, the company wasn't able to meet the market's expectations and slashed its dividend payout by over 30% to just 3.5 cents per share, representing a yield of just 7% if the payout was maintained in the second half. As my colleague Brendan Lau pointed out on the day, the 23.5% fall in the share price was as much due to the lack of definite guidance from management as it was due to the result.
New 10% Dividend Yield
Now analysts are back at it again. The 25% fall in the share price to 68.5 cents from over $1 previously has turned that 7 cent per share payout into a 10% yield if the company maintains its 65% payout ratio.
For the 12 months to December 31 2015, analysts are predicting earnings per share of around 11.5 cents and a dividend per share of between 6 and 7 cents.
Risks and Questions
STW's management team has initiated a 'strategic review' to ensure management focus on costs, integration, and operating efficiency, essentially the factors within their control that they should be reviewing constantly. This review and the potential for a capital raising should earnings not recover are major risks that current and future shareholders need to consider.
Of concern to me is the loss of some major contracts and the failure of the company to win sufficient new business to replace lost revenue. STW controls some 80 businesses under its banner and as a result lacks a competitive advantage over peers. Analysts have also expressed concern over the ability of the many wholly and partially owned companies to collaborate efficiently to win work.
Foolish investors need to really consider whether STW's revenue and profit will be higher in two to three years' time as investing in companies in decline is rarely a formula for making money.
