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." Golub Capital BDC (NASDAQ: GBDC) shares currently have a dividend yield of 7.70%. Golub Capital BDC, Inc. is a business development company and operates as an externally managed closed-end non-diversified management investment company. It invests in debt and minority equity investments in middle-market companies that are, in most cases, sponsored by private equity investors. The company has a P/E ratio of 12.30. The average volume for Golub Capital BDC has been 349,100 shares per day over the past 30 days. Golub Capital BDC has a market cap of $724.8 million and is part of the financial services industry. Shares are down 13.7% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates Golub Capital BDC as a buy. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, compelling growth in net income and growth in earnings per share. We feel these strengths outweigh the fact that the company shows weak operating cash flow. Highlights from the ratings report include:
- The revenue growth greatly exceeded the industry average of 7.9%. Since the same quarter one year prior, revenues rose by 37.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The gross profit margin for GOLUB CAPITAL BDC INC is rather high; currently it is at 67.84%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 58.00% significantly outperformed against the industry average.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Capital Markets industry. The net income increased by 59.2% when compared to the same quarter one year prior, rising from $9.32 million to $14.84 million.
- GOLUB CAPITAL BDC INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, GOLUB CAPITAL BDC INC increased its bottom line by earning $1.36 versus $1.31 in the prior year. For the next year, the market is expecting a contraction of 7.0% in earnings ($1.27 versus $1.36).
- In its most recent trading session, GBDC 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, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- You can view the full Golub Capital BDC Ratings Report.