While plenty of high-yield opportunities exist, investors must always consider the safety of their dividend and the total return potential of their investment. It is not uncommon for a struggling company to suspend high-yielding dividends and subsequently result in precipitous share price declines.
TheStreet Ratings' stock rating model views dividends favorably, but not so much that other factors are disregarded. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e. how much one is willing to risk in order to earn profits?; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to its stock's performance.
These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. As always, stock ratings should not be treated as gospel — rather, use them as a starting point for your own research.
The following pages contain our analysis of 3 stocks with substantial yields, that ultimately, we have rated "Sell." TransAlta Corporation (NYSE: TAC) shares currently have a dividend yield of 7.70%. TransAlta Corporation operates as a non-regulated electricity generation and energy marketing company in Canada, the United States, and Australia. The company engages in the generation and wholesale trade of electricity and other energy-related commodities and derivatives. Currently there is 1 analyst that rates TransAlta Corporation a buy, 3 analysts rate it a sell, and 3 rate it a hold. The average volume for TransAlta Corporation has been 95,300 shares per day over the past 30 days. TransAlta Corporation has a market cap of $3.7 billion and is part of the utilities industry. Shares are down 4.9% year to date as of the close of trading on Monday. TheStreet Ratings rates TransAlta Corporation as a sell. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, generally disappointing historical performance in the stock itself and generally high debt management risk. Highlights from the ratings report include:
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Independent Power Producers & Energy Traders industry and the overall market, TRANSALTA CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- TAC has underperformed the S&P 500 Index, declining 24.24% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- Even though the current debt-to-equity ratio is 1.40, it is still below the industry average, suggesting that this level of debt is acceptable within the Independent Power Producers & Energy Traders industry. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 0.47 is very low and demonstrates very weak liquidity.
- TAC, with its decline in revenue, underperformed when compared the industry average of 7.9%. Since the same quarter one year prior, revenues slightly dropped by 5.7%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- TRANSALTA CORP has improved earnings per share by 36.4% in the most recent quarter compared to the same quarter a year ago. This company has not demonstrated a clear trend in earnings over the past 2 years, making it difficult to accurately predict earnings for the coming year. During the past fiscal year, TRANSALTA CORP swung to a loss, reporting -$2.72 versus $1.30 in the prior year.
- You can view the full TransAlta Corporation Ratings Report.
- OI SA has exprienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, OI SA reported lower earnings of $0.45 versus $0.92 in the prior year. For the next year, the market is expecting a contraction of 89.0% in earnings ($0.05 versus $0.45).
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Diversified Telecommunication Services industry. The net income has significantly decreased by 28.1% when compared to the same quarter one year ago, falling from $71.96 million to $51.71 million.
- Currently the debt-to-equity ratio of 1.68 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Along with the unfavorable debt-to-equity ratio, OIBR maintains a poor quick ratio of 0.91, which illustrates the inability to avoid short-term cash problems.
- Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 49.61%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 75.66% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- 40.20% is the gross profit margin for OI SA which we consider to be strong. Despite the high profit margin, it has decreased significantly from the same period last year.
- You can view the full Oi Ratings Report.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 30.2% when compared to the same quarter one year ago, falling from $14.62 million to $10.20 million.
- Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 44.13%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 30.23% compared to the year-earlier quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
- VOC ENERGY TRUST's earnings per share declined by 30.2% in the most recent quarter compared to the same quarter a year ago. This year, the market expects an improvement in earnings ($2.01 versus $1.42).
- VOC, with its decline in revenue, underperformed when compared the industry average of 2.9%. Since the same quarter one year prior, revenues fell by 29.9%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- The gross profit margin for VOC ENERGY TRUST is currently very high, coming in at 100.00%. VOC has managed to maintain the strong profit margin since the same quarter of last year. Despite the mixed results of the gross profit margin, VOC's net profit margin of 96.14% significantly outperformed against the industry.
- You can view the full VOC Energy Ratings Report.
- Our dividend calendar.