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." THL Credit (NASDAQ: TCRD) shares currently have a dividend yield of 10.10%. THL Credit, Inc. is a business development company specializing in direct and fund of fund investments. The fund seeks to invest in debt and equity securities of middle market companies. The company has a P/E ratio of 9.26. The average volume for THL Credit has been 321,900 shares per day over the past 30 days. THL Credit has a market cap of $455.0 million and is part of the financial services industry. Shares are down 18.6% year-to-date as of the close of trading on Wednesday. TheStreet Ratings rates THL Credit as a hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, compelling growth in net income and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and a generally disappointing performance in the stock itself. Highlights from the ratings report include:
- The revenue growth greatly exceeded the industry average of 5.2%. Since the same quarter one year prior, revenues rose by 44.9%. 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 THL CREDIT INC is rather high; currently it is at 65.35%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 52.55% significantly outperformed against the industry average.
- THL CREDIT INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, THL CREDIT INC increased its bottom line by earning $1.45 versus $1.26 in the prior year. For the next year, the market is expecting a contraction of 7.6% in earnings ($1.34 versus $1.45).
- Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, TCRD has underperformed the S&P 500 Index, declining 12.73% from its price level of one year ago. 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.
- Net operating cash flow has significantly decreased to -$83.40 million or 146.63% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- You can view the full THL Credit Ratings Report.