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." Tronox (NYSE: TROX) shares currently have a dividend yield of 4.70%. Tronox Limited produces and markets titanium ore and titanium dioxide in the Americas, Europe, and the Asia-Pacific. It offers titanium dioxide pigment, which is used in consumer products, such as paint, plastic, and certain specialty products. The company has a P/E ratio of 2.25. The average volume for Tronox has been 653,700 shares per day over the past 30 days. Tronox has a market cap of $1.4 billion and is part of the chemicals industry. Shares are up 15.5% year to date as of the close of trading on Friday. TheStreet Ratings rates Tronox as a sell. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, poor profit margins, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share. Highlights from the ratings report include:
- 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 Chemicals industry. The net income has significantly decreased by 166.0% when compared to the same quarter one year ago, falling from $86.30 million to -$57.00 million.
- The gross profit margin for TRONOX LTD is rather low; currently it is at 24.04%. It has decreased significantly from the same period last year. Along with this, the net profit margin of -12.12% is significantly below that of the industry average.
- The share price of TRONOX LTD has not done very well: it is down 9.95% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. 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.
- TRONOX LTD 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. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, TRONOX LTD increased its bottom line by earning $13.61 versus $11.06 in the prior year. For the next year, the market is expecting a contraction of 101.9% in earnings (-$0.27 versus $13.61).
- TROX's debt-to-equity ratio of 0.97 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 4.71 is very high and demonstrates very strong liquidity.
- You can view the full Tronox Ratings Report.