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." New Mountain Finance (NYSE: NMFC) shares currently have a dividend yield of 9.50%. New Mountain Finance Corporation operates as a closed-end, non-diversified management investment company. The company has a P/E ratio of 8.19. The average volume for New Mountain Finance has been 408,800 shares per day over the past 30 days. New Mountain Finance has a market cap of $682.5 million and is part of the financial services industry. Shares are down 4.8% year-to-date as of the close of trading on Wednesday. TheStreet Ratings rates New Mountain Finance as a hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, disappointing return on equity and a generally disappointing performance in the stock itself. Highlights from the ratings report include:
- The revenue growth came in higher than the industry average of 10.4%. Since the same quarter one year prior, revenues rose by 15.9%. 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 gross profit margin for NEW MOUNTAIN FINANCE CORP is rather high; currently it is at 66.12%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 66.54% significantly outperformed against the industry average.
- Net operating cash flow has increased to -$92.43 million or 28.28% when compared to the same quarter last year. Despite an increase in cash flow of 28.28%, NEW MOUNTAIN FINANCE CORP is still growing at a significantly lower rate than the industry average of 96.60%.
- In its most recent trading session, NMFC 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. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- NEW MOUNTAIN FINANCE CORP's earnings per share declined by 11.1% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last year. We anticipate that this should continue in the coming year. During the past fiscal year, NEW MOUNTAIN FINANCE CORP reported lower earnings of $1.81 versus $2.20 in the prior year. For the next year, the market is expecting a contraction of 24.9% in earnings ($1.36 versus $1.81).
- You can view the full New Mountain Finance Ratings Report.