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." Pepco Holdings (NYSE: POM) shares currently have a dividend yield of 5.20%. Pepco Holdings, Inc., through its subsidiaries, engages in the transmission, distribution, and supply of electricity. The company also distributes and supplies natural gas. The company has a P/E ratio of 31.72. The average volume for Pepco Holdings has been 1,993,600 shares per day over the past 30 days. Pepco Holdings has a market cap of $5.1 billion and is part of the utilities industry. Shares are up 8.4% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates Pepco Holdings as a buy. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity. Highlights from the ratings report include:
- PEPCO HOLDINGS INC has improved earnings per share by 15.8% 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, PEPCO HOLDINGS INC reported lower earnings of $0.98 versus $1.14 in the prior year. This year, the market expects an improvement in earnings ($1.12 versus $0.98).
- Net operating cash flow has slightly increased to $302.00 million or 2.37% when compared to the same quarter last year. Despite an increase in cash flow, PEPCO HOLDINGS INC's cash flow growth rate is still lower than the industry average growth rate of 23.16%.
- POM, with its decline in revenue, slightly underperformed the industry average of 3.6%. Since the same quarter one year prior, revenues slightly dropped by 3.2%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- 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 greatly underperformed compared to the Electric Utilities industry average. The net income increased by 5.3% when compared to the same quarter one year prior, going from $112.00 million to $118.00 million.
- The gross profit margin for PEPCO HOLDINGS INC is currently lower than what is desirable, coming in at 26.71%. Regardless of POM's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 8.77% trails the industry average.
- You can view the full Pepco Holdings Ratings Report.