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 which could 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." Potash Corporation of Saskatchewan (NYSE: POT) shares currently have a dividend yield of 4.10%. Potash Corporation of Saskatchewan Inc., together with its subsidiaries, produces and sells fertilizers and related industrial and feed products worldwide. It mines and produces potash, which is primarily used as fertilizer. The company has a P/E ratio of 16.78. The average volume for Potash Corporation of Saskatchewan has been 6,386,800 shares per day over the past 30 days. Potash Corporation of Saskatchewan has a market cap of $29.2 billion and is part of the chemicals industry. Shares are up 5.4% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates Potash Corporation of Saskatchewan as a hold. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and weak operating cash flow. Highlights from the ratings report include:
- The current debt-to-equity ratio, 0.41, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that POT's debt-to-equity ratio is low, the quick ratio, which is currently 0.65, displays a potential problem in covering short-term cash needs.
- 38.74% is the gross profit margin for POTASH CORP SASK INC which we consider to be strong. Regardless of POT's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, POT's net profit margin of 14.92% compares favorably to the industry average.
- POT, with its decline in revenue, underperformed when compared the industry average of 13.5%. Since the same quarter one year prior, revenues slightly dropped by 6.2%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- 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 Chemicals industry. The net income has significantly decreased by 45.4% when compared to the same quarter one year ago, falling from $421.00 million to $230.00 million.
- Net operating cash flow has decreased to $656.00 million or 24.77% 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.
- You can view the full Potash Corporation of Saskatchewan Ratings Report.