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 "Hold." Legacy Reserves (NASDAQ: LGCY) shares currently have a dividend yield of 8.70%. Legacy Reserves LP, an independent oil and natural gas limited partnership, engages in the acquisition and development of oil and natural gas properties primarily located in the Permian Basin, Mid-Continent, and Rocky Mountain regions of the United States. The average volume for Legacy Reserves has been 162,600 shares per day over the past 30 days. Legacy Reserves has a market cap of $1.5 billion and is part of the energy industry. Shares are up 12.4% year to date as of the close of trading on Tuesday. TheStreet Ratings rates Legacy Reserves as a hold. The company's strengths can be seen in multiple areas, such as its good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and generally higher debt management risk. Highlights from the ratings report include:
- Net operating cash flow has significantly increased by 50.52% to $67.39 million when compared to the same quarter last year. In addition, LEGACY RESERVES LP has also vastly surpassed the industry average cash flow growth rate of -17.93%.
- The gross profit margin for LEGACY RESERVES LP is rather high; currently it is at 54.96%. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, LGCY's net profit margin of 15.13% compares favorably to the industry average.
- LGCY, with its decline in revenue, slightly underperformed the industry average of 10.4%. Since the same quarter one year prior, revenues fell by 12.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- The debt-to-equity ratio of 1.36 is relatively high when compared with the industry average, suggesting a need for better debt level management. Along with the unfavorable debt-to-equity ratio, LGCY maintains a poor quick ratio of 0.73, which illustrates the inability to avoid short-term cash problems.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, LEGACY RESERVES LP's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full Legacy Reserves Ratings Report.