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." NGL Energy Partners (NYSE: NGL) shares currently have a dividend yield of 5.40%. NGL Energy Partners LP, through its subsidiaries, engages in propane and other natural gas liquids businesses in the United States. The company operates in four segments: Crude Oil Logistics, Water Services, Natural Gas Liquids Logistics, and Retail Propane. The company has a P/E ratio of 160.26. The average volume for NGL Energy Partners has been 230,500 shares per day over the past 30 days. NGL Energy Partners has a market cap of $2.9 billion and is part of the energy industry. Shares are up 15.1% year-to-date as of the close of trading on Monday. TheStreet Ratings rates NGL Energy Partners as a sell. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity and poor profit margins. 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 against the S&P 500 and did not exceed that of the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 40.5% when compared to the same quarter one year ago, falling from $40.18 million to $23.90 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 Oil, Gas & Consumable Fuels industry and the overall market, NGL ENERGY PARTNERS LP's return on equity significantly trails that of both the industry average and the S&P 500.
- The gross profit margin for NGL ENERGY PARTNERS LP is currently extremely low, coming in at 6.14%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 0.87% trails that of the industry average.
- NGL's debt-to-equity ratio of 1.00 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 0.81 is weak.
- Compared to its closing price of one year ago, NGL's share price has jumped by 37.15%, exceeding the performance of the broader market during that same time frame. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.
- You can view the full NGL Energy Partners Ratings Report.