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 5 stocks with substantial yields, that ultimately, we have rated "Sell." Chesapeake Midstream Partners L.P (NYSE: CHKM) shares currently have a dividend yield of 5.60%. Chesapeake Midstream Partners, L.P. owns, operates, develops, and acquires natural gas, natural gas liquids, and oil gathering systems, as well as other midstream energy assets in the United States. The company has a P/E ratio of 36.28. The average volume for Chesapeake Midstream Partners L.P has been 386,900 shares per day over the past 30 days. Chesapeake Midstream Partners L.P has a market cap of $2.3 billion and is part of the energy industry. Shares are up 20.9% year to date as of the close of trading on Friday. TheStreet Ratings rates Chesapeake Midstream Partners L.P as a sell. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, weak operating cash flow and generally weak debt management. Highlights from the ratings report include:
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Oil, Gas & Consumable Fuels industry and the overall market, CHESAPEAKE MIDSTRM PRTNRS-LP's return on equity is significantly below that of the industry average and is below that of the S&P 500.
- Net operating cash flow has significantly decreased to $67.22 million or 51.03% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- Despite currently having a low debt-to-equity ratio of 0.48, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that CHKM's debt-to-equity ratio is mixed in its results, the company's quick ratio of 0.69 is low and demonstrates weak liquidity.
- After a year of stock price fluctuations, the net result is that CHKM's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
- CHESAPEAKE MIDSTRM PRTNRS-LP has improved earnings per share by 25.9% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CHESAPEAKE MIDSTRM PRTNRS-LP reported lower earnings of $1.36 versus $1.40 in the prior year. This year, the market expects an improvement in earnings ($1.44 versus $1.36).
- You can view the full Chesapeake Midstream Partners L.P Ratings Report.