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."Southern (NYSE: SO) shares currently have a dividend yield of 4.90%. The Southern Company, together with its subsidiaries, operates as a public electric utility company. The company has a P/E ratio of 15.22. The average volume for Southern has been 5,268,200 shares per day over the past 30 days. Southern has a market cap of $36.4 billion and is part of the utilities industry. Shares are up 0.4% year-to-date as of the close of trading on Monday. TheStreet Ratings rates Southern as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share and increase in net income. We feel these strengths outweigh the fact that the company shows low profit margins. Highlights from the ratings report include:
- SO's revenue growth has slightly outpaced the industry average of 0.4%. Since the same quarter one year prior, revenues slightly increased by 6.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- SOUTHERN CO has improved earnings per share by 9.3% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SOUTHERN CO reported lower earnings of $1.87 versus $2.67 in the prior year. This year, the market expects an improvement in earnings ($2.76 versus $1.87).
- The company, on the basis of net income growth from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Electric Utilities industry average. The net income increased by 8.0% when compared to the same quarter one year prior, going from $399.00 million to $431.00 million.
- SO has underperformed the S&P 500 Index, declining 8.18% 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.
- The gross profit margin for SOUTHERN CO is currently lower than what is desirable, coming in at 33.28%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 10.97% trails that of the industry average.
- You can view the full Southern Ratings Report.
- The revenue growth came in higher than the industry average of 1.4%. Since the same quarter one year prior, revenues rose by 11.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 146.7% when compared to the same quarter one year prior, rising from $24.20 million to $59.70 million.
- Net operating cash flow has slightly increased to $99.50 million or 9.94% when compared to the same quarter last year. In addition, TARGA RESOURCES PARTNERS LP has also vastly surpassed the industry average cash flow growth rate of -44.35%.
- Powered by its strong earnings growth of 275.00% and other important driving factors, this stock has surged by 30.22% over the past year, outperforming the rise in the S&P 500 Index during the same period. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
- TARGA RESOURCES PARTNERS LP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, TARGA RESOURCES PARTNERS LP reported lower earnings of $1.20 versus $1.98 in the prior year. For the next year, the market is expecting a contraction of 23.3% in earnings ($0.92 versus $1.20).
- You can view the full Targa Resources Partners Ratings Report.
- The revenue growth greatly exceeded the industry average of 1.4%. Since the same quarter one year prior, revenues rose by 35.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- KINDER MORGAN ENERGY -LP reported significant earnings per share improvement 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, KINDER MORGAN ENERGY -LP turned its bottom line around by earning $1.64 versus -$0.33 in the prior year. This year, the market expects an improvement in earnings ($2.74 versus $1.64).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 70.1% when compared to the same quarter one year prior, rising from $405.00 million to $689.00 million.
- Net operating cash flow has increased to $956.00 million or 18.02% when compared to the same quarter last year. In addition, KINDER MORGAN ENERGY -LP has also vastly surpassed the industry average cash flow growth rate of -44.35%.
- 39.07% is the gross profit margin for KINDER MORGAN ENERGY -LP which we consider to be strong. Regardless of KMP's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, KMP's net profit margin of 20.37% significantly outperformed against the industry.
- You can view the full Kinder Morgan Energy Partners Ratings Report.
- Our dividend calendar.