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 "Buy." Entergy (NYSE: ETR) shares currently have a dividend yield of 4.70%. Entergy Corporation, together with its subsidiaries, is engaged in the electric power production and retail electric distribution operations in the United States. It generates electricity through gas/oil, nuclear, coal, and hydro power. The company has a P/E ratio of 16.29. The average volume for Entergy has been 1,660,800 shares per day over the past 30 days. Entergy has a market cap of $12.6 billion and is part of the utilities industry. Shares are up 11.2% year-to-date as of the close of trading on Friday. TheStreet Ratings rates Entergy as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- ETR's revenue growth has slightly outpaced the industry average of 3.0%. Since the same quarter one year prior, revenues rose by 10.5%. 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 increased to $989.76 million or 37.37% when compared to the same quarter last year. Despite an increase in cash flow, ENTERGY CORP's average is still marginally south of the industry average growth rate of 42.87%.
- ENTERGY CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, ENTERGY CORP reported lower earnings of $3.98 versus $4.75 in the prior year. This year, the market expects an improvement in earnings ($5.32 versus $3.98).
- In its most recent trading session, ETR 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 our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- 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 Electric Utilities industry. The net income has significantly decreased by 49.9% when compared to the same quarter one year ago, falling from $301.85 million to $151.35 million.
- You can view the full Entergy Ratings Report.