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 "Sell." Life Partners Holdings (NASDAQ: LPHI) shares currently have a dividend yield of 7.20%. Life Partners Holdings, Inc., through its subsidiary, Life Partners, Inc., operates in the secondary market for life insurance worldwide. It facilitates the sale of life settlements between sellers and purchasers, but does not take possession or control of the policies. The average volume for Life Partners Holdings has been 87,000 shares per day over the past 30 days. Life Partners Holdings has a market cap of $51.9 million and is part of the insurance industry. Shares are up 55.6% year-to-date as of the close of trading on Monday. TheStreet Ratings rates Life Partners Holdings as a sell. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself. Highlights from the ratings report include:
- 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 Diversified Financial Services industry. The net income has decreased by 24.5% when compared to the same quarter one year ago, dropping from -$0.75 million to -$0.94 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Diversified Financial Services industry and the overall market, LIFE PARTNERS HOLDINGS INC's return on equity significantly trails that of both the industry average and the S&P 500.
- Net operating cash flow has significantly decreased to -$0.31 million or 129.82% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- Looking at the price performance of LPHI's shares over the past 12 months, there is not much good news to report: the stock is down 27.11%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- LIFE PARTNERS HOLDINGS INC's earnings per share declined by 25.0% in the most recent quarter compared to the same quarter a year ago. Stable Earnings per share over the past year indicate the company has sound management over its earnings and share float. During the past fiscal year, LIFE PARTNERS HOLDINGS INC continued to lose money by earning -$0.16 versus -$0.17 in the prior year.
- You can view the full Life Partners Holdings Ratings Report.