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." Home Properties (NYSE: HME) shares currently have a dividend yield of 5.00%. Home Properties, Inc. is an independent real estate investment trust. The firm invests in the real estate markets of the United States. It is engaged in the ownership, management, acquisition, rehabilitation and development of residential apartment communities. The company has a P/E ratio of 19.92. The average volume for Home Properties has been 433,700 shares per day over the past 30 days. Home Properties has a market cap of $3.3 billion and is part of the real estate industry. Shares are up 8.8% year-to-date as of the close of trading on Friday. TheStreet Ratings rates Home Properties as a hold. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, revenue growth and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, a generally disappointing performance in the stock itself and poor profit margins. Highlights from the ratings report include:
- HOME PROPERTIES INC 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. This trend suggests that the performance of the business is improving. During the past fiscal year, HOME PROPERTIES INC increased its bottom line by earning $1.44 versus $0.94 in the prior year. This year, the market expects an improvement in earnings ($1.55 versus $1.44).
- Despite its growing revenue, the company underperformed as compared with the industry average of 7.3%. Since the same quarter one year prior, revenues slightly increased by 3.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- In its most recent trading session, HME 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. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
- 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 decreased by 18.4% when compared to the same quarter one year ago, dropping from $69.77 million to $56.92 million.
- You can view the full Home Properties Ratings Report.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 105.2% when compared to the same quarter one year prior, rising from $14.44 million to $29.62 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 7.3%. Since the same quarter one year prior, revenues slightly increased by 4.2%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- PIEDMONT OFFICE REALTY TRUST has improved earnings per share by 12.5% 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 year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, PIEDMONT OFFICE REALTY TRUST increased its bottom line by earning $0.44 versus $0.36 in the prior year. For the next year, the market is expecting a contraction of 25.0% in earnings ($0.33 versus $0.44).
- PDM has underperformed the S&P 500 Index, declining 13.69% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- The gross profit margin for PIEDMONT OFFICE REALTY TRUST is rather low; currently it is at 21.21%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 21.43% trails that of the industry average.
- You can view the full Piedmont Office Realty Ratings Report.
- HCN's very impressive revenue growth greatly exceeded the industry average of 7.3%. Since the same quarter one year prior, revenues leaped by 70.6%. 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 $219.17 million or 3.17% when compared to the same quarter last year. In addition, HEALTH CARE REIT INC has also vastly surpassed the industry average cash flow growth rate of -59.31%.
- HEALTH CARE REIT INC's earnings per share declined by 44.4% 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, HEALTH CARE REIT INC increased its bottom line by earning $0.46 versus $0.34 in the prior year. For the next year, the market is expecting a contraction of 13.0% in earnings ($0.40 versus $0.46).
- The gross profit margin for HEALTH CARE REIT INC is rather low; currently it is at 18.93%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 4.74% significantly trails the industry average.
- The share price of HEALTH CARE REIT INC has not done very well: it is down 9.17% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.
- You can view the full Health Care REIT Ratings Report.
- Our dividend calendar.