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." Hatteras Financial Corporation (NYSE: HTS) shares currently have a dividend yield of 11.50%. Hatteras Financial Corp. operates as an externally-managed mortgage real estate investment trust (REIT) in the United States. The average volume for Hatteras Financial Corporation has been 1,383,800 shares per day over the past 30 days. Hatteras Financial Corporation has a market cap of $1.7 billion and is part of the real estate industry. Shares are up 8.6% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates Hatteras Financial Corporation as a sell. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself. Highlights from the ratings report include:
- HATTERAS FINANCIAL CORP has experienced 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, HATTERAS FINANCIAL CORP reported lower earnings of $3.65 versus $3.96 in the prior year. For the next year, the market is expecting a contraction of 127.1% in earnings (-$0.99 versus $3.65).
- 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 Real Estate Investment Trusts (REITs) industry. The net income has significantly decreased by 411.9% when compared to the same quarter one year ago, falling from $84.05 million to -$262.15 million.
- 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 Real Estate Investment Trusts (REITs) industry and the overall market, HATTERAS FINANCIAL CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- Net operating cash flow has decreased to $79.43 million or 30.50% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
- Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 34.20%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 427.71% 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.
- You can view the full Hatteras Financial Corporation Ratings Report.