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." ATA (NASDAQ: ATAI) shares currently have a dividend yield of 8.40%. ATA Inc., together with its subsidiaries, provides computer-based testing services in the People's Republic of China. The company has a P/E ratio of 23.20. The average volume for ATA has been 17,700 shares per day over the past 30 days. ATA has a market cap of $106.9 million and is part of the diversified services industry. Shares are up 16% year-to-date as of the close of trading on Monday. TheStreet Ratings rates ATA as a hold. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and relatively poor performance when compared with the S&P 500 during the past year. Highlights from the ratings report include:
- ATAI has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 4.96, which clearly demonstrates the ability to cover short-term cash needs.
- The gross profit margin for ATA INC -ADS is rather high; currently it is at 58.58%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -29.03% is in-line with the industry average.
- In its most recent trading session, ATAI 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. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Diversified Consumer Services industry. The net income has significantly decreased by 139.9% when compared to the same quarter one year ago, falling from -$0.97 million to -$2.33 million.
- You can view the full ATA Ratings Report.