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." Hersha Hospitality (NYSE: HT) shares currently have a dividend yield of 4.20%. Operates as a Maryland REIT that focuses primarily on owning and operating high quality, upscale and mid-scale limited service and extended-stay hotels. Its portfolio consisted of 31 wholly-owned limited and full service properties and joint venture investments in 16 hotels as of Dec. 31, 2005. The company has a P/E ratio of 296.00. The average volume for Hersha Hospitality has been 2,199,500 shares per day over the past 30 days. Hersha Hospitality has a market cap of $1.1 billion and is part of the real estate industry. Shares are up 3.4% year-to-date as of the close of trading on Wednesday. TheStreet Ratings rates Hersha Hospitality as a hold. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income and notable return on equity. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, weak operating cash flow and poor profit margins. Highlights from the ratings report include:
- HT's revenue growth has slightly outpaced the industry average of 6.8%. Since the same quarter one year prior, revenues slightly increased by 9.8%. 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.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 434.7% when compared to the same quarter one year prior, rising from $6.78 million to $36.28 million.
- HERSHA HOSPITALITY TRUST 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. 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, HERSHA HOSPITALITY TRUST turned its bottom line around by earning $0.02 versus -$0.03 in the prior year. This year, the market expects an improvement in earnings ($0.07 versus $0.02).
- Net operating cash flow has decreased to $20.07 million or 11.81% 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.
- In its most recent trading session, HT 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. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
- You can view the full Hersha Hospitality Ratings Report.