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Should you buy STW Communications Group Ltd and its 6.9% dividend yield?

Credit: kropeekk_pl

Shares in leading marketing and communications (marcom) company STW Communications Group Ltd. (ASX: SGN) are trading 4% higher on Friday at 82.5 cents after the group reported its full year profit results for the year ending December 31.

Here are the key points investors need to know:

  • Revenue increased 1.6% to $416 million
  • Earnings before interest, tax, depreciation and amortisation (EBITDA) declined 7.8% to $76.8 million
  • Underlying net profit after tax dropped 13.1% to $39.6 million
  • Underlying earnings per share fell 16.3% to 9.5 cents per share (cps)
  • A final fully franked dividend of 3.6 cps has been declared. The shares will trade ex-dividend on March 23 with a payment date of April 26
  • Total dividends for the year were 5.7 cps which equates to a fully franked dividend yield of 6.9% based on today’s share price

Outlook

The big news for STW is the proposed merger between the Australian and New Zealand operations of major shareholder WPP. This merger is set to deliver a clear leader in the domestic marcom space.

Given the significant changes to the business operations proposed, management has declined to provide guidance for 2016. However it did note that “as a standalone business, STW expects to deliver mid-to-high-single digit growth in underlying net profit after tax.”

The proposed merger with WPP’s local operations will see STW issue a significant number of shares and take on $125 million more in debt. Given the lack of guidance, investors should be careful about extrapolating 2015 earnings per share and dividends going forward in the hope of chasing a high yield or apparent value stock.

In fact, many of STW’s media sector peers are trading on low multiples and high yields but they may not be great investment candidates given their structural challenges. In contrast, the outdoor advertising space appears to be in a “sweet spot” with APN Outdoor Group Ltd (ASX: APO), oOh!Media Ltd (ASX: OML) and QMS Media Ltd (ASX: QMS) all enjoying a favourable operating environment.

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Returns As of 6th October 2020

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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