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." Lorillard (NYSE: LO) shares currently have a dividend yield of 4.20%. Lorillard, Inc., through its subsidiaries, manufactures and sells cigarettes in the United States. The company operates through two segments, Cigarettes and Electronic Cigarettes. The company has a P/E ratio of 19.42. The average volume for Lorillard has been 3,704,700 shares per day over the past 30 days. Lorillard has a market cap of $21.3 billion and is part of the tobacco industry. Shares are up 18.9% year-to-date as of the close of trading on Thursday. TheStreet Ratings rates Lorillard as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- Despite its growing revenue, the company underperformed as compared with the industry average of 3.2%. Since the same quarter one year prior, revenues slightly increased by 2.2%. 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.
- Compared to its closing price of one year ago, LO's share price has jumped by 36.49%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- LORILLARD INC's earnings per share declined by 13.9% in the most recent quarter compared to 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, LORILLARD INC increased its bottom line by earning $3.14 versus $2.81 in the prior year. This year, the market expects an improvement in earnings ($3.44 versus $3.14).
- Net operating cash flow has remained constant at $703.00 million with no significant change when compared to the same quarter last year. Along with maintaining stable cash flow from operations, the firm exceeded the industry average cash flow growth rate of -31.77%.
- The gross profit margin for LORILLARD INC is rather high; currently it is at 55.62%. Regardless of LO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 23.62% trails the industry average.
- You can view the full Lorillard Ratings Report.