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." Ameren (NYSE: AEE) shares currently have a dividend yield of 4.40%. Ameren Corporation operates as a public utility holding company in the United States. It operates in three segments: Ameren Missouri, Ameren Illinois, and Merchant Generation. The average volume for Ameren has been 1,674,400 shares per day over the past 30 days. Ameren has a market cap of $8.9 billion and is part of the utilities industry. Shares are up 18.6% year to date as of the close of trading on Monday. TheStreet Ratings rates Ameren as a buy. The company's strengths can be seen in multiple areas, such as its increase in stock price during the past year and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- The debt-to-equity ratio is somewhat low, currently at 0.95, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.20 is very weak and demonstrates a lack of ability to pay short-term obligations.
- AMEREN CORP's earnings per share declined by 49.4% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, AMEREN CORP swung to a loss, reporting -$2.20 versus $2.14 in the prior year. This year, the market expects an improvement in earnings ($2.11 versus -$2.20).
- AEE, with its decline in revenue, underperformed when compared the industry average of 1.9%. Since the same quarter one year prior, revenues fell by 15.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- Net operating cash flow has declined marginally to $389.00 million or 5.81% when compared to the same quarter last year. Despite a decrease in cash flow AMEREN CORP is still fairing well by exceeding its industry average cash flow growth rate of -35.80%.
- You can view the full Ameren Ratings Report.