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 4 stocks with substantial yields, that ultimately, we have rated "Sell." Oi (NYSE: OIBR) shares currently have a dividend yield of 12.90%. Oi S.A., through its subsidiaries, provides integrated telecommunication services for residential customers, companies, and governmental agencies in Brazil. It operates in three segments: Fixed-Line and Data Transmission Services, Mobile Services, and Other Services. The average volume for Oi has been 3,544,200 shares per day over the past 30 days. Oi has a market cap of $3.6 billion and is part of the telecommunications industry. Shares are down 51.6% year to date as of the close of trading on Friday. TheStreet Ratings rates Oi as a sell. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, unimpressive growth in net income, generally high debt management risk and generally disappointing historical performance in the stock itself. Highlights from the ratings report include:
- 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 $0.82 versus $0.92 in the prior year. For the next year, the market is expecting a contraction of 72.1% in earnings ($0.23 versus $0.82).
- 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 46.8% when compared to the same quarter one year ago, falling from $243.94 million to $129.79 million.
- The debt-to-equity ratio is very high at 3.15 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, OIBR maintains a poor quick ratio of 0.82, 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 47.00%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 80.64% 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.
- 43.70% is the gross profit margin for OI SA which we consider to be strong. Regardless of OIBR's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 3.72% trails the industry average.
- You can view the full Oi Ratings Report.