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 "Buy." Lorillard (NYSE: LO) shares currently have a dividend yield of 5.10%. Lorillard, Inc. manufactures and sells cigarettes in the United States. The company operates through two segments, Cigarettes and Electronic Cigarettes. The Cigarettes segment manufactures and sells cigarettes. The company has a P/E ratio of 13.85. The average volume for Lorillard has been 3,347,700 shares per day over the past 30 days. Lorillard has a market cap of $16.3 billion and is part of the tobacco industry. Shares are up 11.3% year to date as of the close of trading on Monday. TheStreet Ratings rates Lorillard as a buy. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, increase in net income, revenue growth, expanding profit margins and good cash flow from operations. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results. Highlights from the ratings report include:
- LORILLARD INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, LORILLARD INC increased its bottom line by earning $2.81 versus $2.67 in the prior year. This year, the market expects an improvement in earnings ($3.11 versus $2.81).
- The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Tobacco industry average. The net income increased by 47.1% when compared to the same quarter one year prior, rising from $223.00 million to $328.00 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 6.9%. Since the same quarter one year prior, revenues slightly increased by 5.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The gross profit margin for LORILLARD INC is rather high; currently it is at 64.50%. It has increased significantly from the same period last year. Along with this, the net profit margin of 29.23% is above that of the industry average.
- Net operating cash flow has slightly increased to $699.00 million or 1.30% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -23.93%.
- You can view the full Lorillard Ratings Report.