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." Darden Restaurants (NYSE: DRI) shares currently have a dividend yield of 4.90%. Darden Restaurants, Inc. owns and operates full service restaurants in the United States and Canada. It operates restaurants under the Olive Garden, LongHorn Steakhouse, The Capital Grille, Yard House, Seasons 52, Bahama Breeze, Eddie V's Prime Seafood, and Wildfish Seafood Grille brand names. The company has a P/E ratio of 32.55. The average volume for Darden Restaurants has been 1,464,100 shares per day over the past 30 days. Darden Restaurants has a market cap of $5.9 billion and is part of the leisure industry. Shares are down 13.8% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates Darden Restaurants as a hold. The company's strengths can be seen in multiple areas, such as its revenue growth and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity. Highlights from the ratings report include:
- The revenue growth came in higher than the industry average of 6.5%. Since the same quarter one year prior, revenues slightly increased by 3.6%. 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.
- DARDEN RESTAURANTS INC's earnings per share declined by 39.0% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, DARDEN RESTAURANTS INC reported lower earnings of $1.38 versus $1.80 in the prior year. This year, the market expects an improvement in earnings ($2.25 versus $1.38).
- The debt-to-equity ratio of 1.28 is relatively high when compared with the industry average, suggesting a need for better debt level management. Along with this, the company manages to maintain a quick ratio of 0.11, which clearly demonstrates the inability to cover short-term cash needs.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, DARDEN RESTAURANTS INC's return on equity is below that of both the industry average and the S&P 500.
- You can view the full Darden Restaurants Ratings Report.