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 "Sell." Northern Tier Energy (NYSE: NTI) shares currently have a dividend yield of 11.30%. Northern Tier Energy LP, an independent downstream energy company, is engaged in refining, retail, and pipeline operations in the United States. It operates through two segments, Refining and Retail. The company has a P/E ratio of 13.71. The average volume for Northern Tier Energy has been 502,600 shares per day over the past 30 days. Northern Tier Energy has a market cap of $2.5 billion and is part of the energy industry. Shares are up 9.3% year-to-date as of the close of trading on Monday. TheStreet Ratings rates Northern Tier Energy as a sell. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income and poor profit margins. Highlights from the ratings report include:
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 40.1% when compared to the same quarter one year ago, falling from $119.40 million to $71.50 million.
- The gross profit margin for NORTHERN TIER ENERGY LP is currently extremely low, coming in at 9.79%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 5.68% trails that of the industry average.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. When compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, NORTHERN TIER ENERGY LP's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- Compared to where it was a year ago, the stock is now trading at a higher level, and has traded in line with the S&P 500. Turning our attention to the future direction of the stock, we do not believe this stock offers ample reward opportunity to compensate for the risks, despite the fact that it rose over the past year.
- NORTHERN TIER ENERGY LP's earnings per share declined by 40.8% 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, NORTHERN TIER ENERGY LP increased its bottom line by earning $2.52 versus $2.14 in the prior year. This year, the market expects an improvement in earnings ($3.51 versus $2.52).
- You can view the full Northern Tier Energy Ratings Report.