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." Ensco (NYSE: ESV) shares currently have a dividend yield of 5.90%. Ensco plc provides offshore contract drilling services to the oil and gas industry worldwide. The company operates through three segments: Floaters, Jackups, and Other. The company has a P/E ratio of 26.18. The average volume for Ensco has been 2,673,800 shares per day over the past 30 days. Ensco has a market cap of $11.8 billion and is part of the energy industry. Shares are down 11.6% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates Ensco as a hold. The company's strengths can be seen in multiple areas, such as its expanding profit margins, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity. Highlights from the ratings report include:
- The gross profit margin for ENSCO PLC is rather high; currently it is at 52.12%. 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 -97.48% is in-line with the industry average.
- Net operating cash flow has increased to $504.80 million or 14.18% when compared to the same quarter last year. Despite an increase in cash flow, ENSCO PLC's average is still marginally south of the industry average growth rate of 22.16%.
- ESV, with its decline in revenue, underperformed when compared the industry average of 21.4%. Since the same quarter one year prior, revenues slightly dropped by 3.6%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Energy Equipment & Services industry and the overall market, ENSCO PLC's return on equity significantly trails that of both the industry average and the S&P 500.
- The share price of ENSCO PLC has not done very well: it is down 11.67% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
- You can view the full Ensco Ratings Report.