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." Entergy (NYSE: ETR) shares currently have a dividend yield of 4.60%. Entergy Corporation, together with its subsidiaries, is engaged in the electric power production and retail electric distribution operations in the United States. It generates electricity through gas/oil, nuclear, coal, and hydro power. The company has a P/E ratio of 13.34. The average volume for Entergy has been 1,762,100 shares per day over the past 30 days. Entergy has a market cap of $13.1 billion and is part of the utilities industry. Shares are up 15.4% year-to-date as of the close of trading on Friday. TheStreet Ratings rates Entergy as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, increase in net income, increase in stock price during the past year and growth in earnings per share. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated. Highlights from the ratings report include:
- ETR's revenue growth has slightly outpaced the industry average of 5.7%. Since the same quarter one year prior, revenues slightly increased by 9.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Electric Utilities industry average. The net income increased by 15.6% when compared to the same quarter one year prior, going from $168.06 million to $194.28 million.
- Net operating cash flow has increased to $761.41 million or 33.13% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 7.84%.
- The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- ENTERGY CORP has improved earnings per share by 14.1% 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, ENTERGY CORP reported lower earnings of $3.98 versus $4.75 in the prior year. This year, the market expects an improvement in earnings ($6.15 versus $3.98).
- You can view the full Entergy Ratings Report.
- The revenue growth greatly exceeded the industry average of 9.5%. Since the same quarter one year prior, revenues rose by 41.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 136.1% when compared to the same quarter one year prior, rising from $2.47 million to $5.83 million.
- RETAIL OPPORTUNITY INVTS CP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, RETAIL OPPORTUNITY INVTS CP increased its bottom line by earning $0.47 versus $0.15 in the prior year. For the next year, the market is expecting a contraction of 60.6% in earnings ($0.19 versus $0.47).
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market on the basis of return on equity, RETAIL OPPORTUNITY INVTS CP underperformed against that of the industry average and is significantly less than that of the S&P 500.
- You can view the full Retail Opportunity Investments Ratings Report.
- RRD's revenue growth has slightly outpaced the industry average of 5.6%. Since the same quarter one year prior, revenues rose by 12.9%. 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 company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Commercial Services & Supplies industry and the overall market, DONNELLEY (R R) & SONS CO's return on equity exceeds that of both the industry average and the S&P 500.
- DONNELLEY (R R) & SONS CO's earnings per share declined by 11.1% 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, DONNELLEY (R R) & SONS CO turned its bottom line around by earning $1.15 versus -$3.61 in the prior year. This year, the market expects an improvement in earnings ($1.54 versus $1.15).
- The debt-to-equity ratio is very high at 4.29 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Even though the debt-to-equity ratio is weak, RRD's quick ratio is somewhat strong at 1.01, demonstrating the ability to handle short-term liquidity needs.
- Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, RRD has underperformed the S&P 500 Index, declining 8.59% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- You can view the full RR Donnelley & Sons Ratings Report.
- Our dividend calendar.