Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link. TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates.
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."Entergy (NYSE: ETR) shares currently have a dividend yield of 5.50%. Entergy Corporation, together with its subsidiaries, engages in the electric power production and retail electric distribution operations in the United States. The company generates electricity through various sources, such as gas/oil, nuclear, coal, and hydro power. The company has a P/E ratio of 12.56. The average volume for Entergy has been 1,396,900 shares per day over the past 30 days. Entergy has a market cap of $10.8 billion and is part of the utilities industry. Shares are down 3.5% year-to-date as of the close of trading on Friday. TheStreet Ratings rates Entergy as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- The revenue growth came in higher than the industry average of 2.1%. Since the same quarter one year prior, revenues rose by 13.1%. 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 slightly increased to $1,083.55 million or 5.00% when compared to the same quarter last year. In addition, ENTERGY CORP has also modestly surpassed the industry average cash flow growth rate of 4.41%.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Electric Utilities industry and the overall market on the basis of return on equity, ENTERGY CORP has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- ENTERGY CORP's earnings per share declined by 29.1% 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, ENTERGY CORP reported lower earnings of $4.75 versus $7.54 in the prior year. This year, the market expects an improvement in earnings ($5.00 versus $4.75).
- In its most recent trading session, ETR has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. 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 Entergy Ratings Report.
- 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.
- Regardless of the drop in revenue, the company managed to outperform against the industry average of 3.5%. Since the same quarter one year prior, revenues slightly dropped by 0.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- TELEFONICA SA's earnings per share declined by 12.5% 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, TELEFONICA SA reported lower earnings of $1.14 versus $1.57 in the prior year. This year, the market expects an improvement in earnings ($1.38 versus $1.14).
- 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. In comparison to the other companies in the Diversified Telecommunication Services industry and the overall market, TELEFONICA SA's return on equity significantly exceeds that of the industry average and is above that of the S&P 500.
- The gross profit margin for TELEFONICA SA is currently lower than what is desirable, coming in at 32.23%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 7.70% trails that of the industry average.
- You can view the full Telefonica Ratings Report.
- RDS.A's revenue growth has slightly outpaced the industry average of 5.6%. Since the same quarter one year prior, revenues slightly increased by 3.9%. 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 slightly increased to $10,409.00 million or 9.76% when compared to the same quarter last year. In addition, ROYAL DUTCH SHELL PLC has also modestly surpassed the industry average cash flow growth rate of 2.81%.
- RDS.A's debt-to-equity ratio is very low at 0.21 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.82 is somewhat weak and could be cause for future problems.
- ROYAL DUTCH SHELL PLC's earnings per share declined by 34.2% 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, ROYAL DUTCH SHELL PLC reported lower earnings of $8.50 versus $9.94 in the prior year. This year, the market expects an improvement in earnings ($13.57 versus $8.50).
- You can view the full Royal Dutch Shell PLC ADR Class A Ratings Report.
- Our dividend calendar.