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Is it time to buy Seven West Media Ltd shares? 

After Seven West Media Ltd (ASX: SWM) shares soared on Friday following the announcement of the cricket deal, the shares started this week lower.

On Friday the company announced it would pay about $75 million a year over six years from 2018 to broadcast the majority of the Big Bash matches and all home international tests along with Foxtel.

Foxtel holds one-day internationals, international T20s and digital rights. Previously Channel Nine owned by Nine Entertainment Co Holdings Ltd (ASX: NEC) had the rights to the Tests, and Channel Ten to the Big Bash.

Seven has fallen over 18% in the last year to a current trading price of $0.525. On Friday the shares rallied to $0.580 but have fallen this week, although are still up on the price before the cricket announcement.

The company is trading on a trailing dividend yield of 6.9% per annum before franking and after franking nearly 9.9% per annum.

While continuing to pay steep license fees, the outlook for free-to-air’s earnings growth remains uncertain as the free-to-air channels struggle in a soft advertising market, and competition from other options such as Netflix and Foxtel.

Channel 10 has been taken over by CBS after failure to pass media laws that would have allowed News Corp (ASX: NEWS) to buy the station. 

Investors may think a franked yield of nearly 10% per annum is a steal, but with the uncertainty about future earnings it may not be a great investment.

On Friday investors were positive, now not so positive. In Seven’s favour is the fact that it has the free-to-air rights to broadcast AFL as well. So major winter and summer sports will be on Seven. 

Outlook

But, the continuing demise of free-to-air television means that it may be time to get out companies such as Seven.

The outlook may look a little rosier on the cricket deal but competition from other quarters is going to grow, especially from digital and pay TV.

Millennials are more likely to stream a movie from Netflix on their mobile phone or tablet than free-to-air. During the screening of cricket, advertising revenue at Seven will likely get a nice boost, but the higher cost base from buying the rights will put pressure on earnings.

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Motley Fool contributor Rosemary Steinfort has no position in any of the stocks mentioned. 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 Scott Phillips.

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