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." Darden Restaurants (NYSE: DRI) shares currently have a dividend yield of 4.70%. Darden Restaurants, Inc. owns and operates full service restaurants in the United States and Canada. It operates restaurants under the Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's Prime Seafood, and Wildfish Seafood Grille brand names. The company has a P/E ratio of 14.95. The average volume for Darden Restaurants has been 1,463,600 shares per day over the past 30 days. Darden Restaurants has a market cap of $6.1 billion and is part of the leisure industry. Shares are up 4.1% year to date as of the close of trading on Wednesday. TheStreet Ratings rates Darden Restaurants as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share. Highlights from the ratings report include:
- DRI's revenue growth has slightly outpaced the industry average of 3.3%. Since the same quarter one year prior, revenues rose by 11.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has increased to $259.60 million or 22.68% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 6.71%.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market on the basis of return on equity, DARDEN RESTAURANTS INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, DRI has underperformed the S&P 500 Index, declining 10.56% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- You can view the full Darden Restaurants Ratings Report.
- MPW's revenue growth has slightly outpaced the industry average of 10.8%. Since the same quarter one year prior, revenues rose by 17.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. 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.
- MEDICAL PROPERTIES TRUST has improved earnings per share by 21.4% 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, MEDICAL PROPERTIES TRUST increased its bottom line by earning $0.56 versus $0.13 in the prior year. This year, the market expects an improvement in earnings ($0.74 versus $0.56).
- The gross profit margin for MEDICAL PROPERTIES TRUST is rather high; currently it is at 68.15%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 46.62% significantly outperformed against the industry average.
- Net operating cash flow has increased to $29.19 million or 38.55% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 5.77%.
- You can view the full Medical Properties Ratings Report.
- The gross profit margin for GLAXOSMITHKLINE PLC is currently very high, coming in at 71.13%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 15.65% trails the industry average.
- Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. 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.
- GLAXOSMITHKLINE PLC's earnings per share declined by 13.3% 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 year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, GLAXOSMITHKLINE PLC reported lower earnings of $2.94 versus $3.21 in the prior year. This year, the market expects an improvement in earnings ($3.57 versus $2.94).
- GSK, with its decline in revenue, slightly underperformed the industry average of 4.1%. Since the same quarter one year prior, revenues slightly dropped by 3.4%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Pharmaceuticals industry and the overall market, GLAXOSMITHKLINE PLC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- You can view the full GlaxoSmithKline Ratings Report.
- Our dividend calendar.