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."FS Investment Dividend Yield: 9.90% FS Investment (NYSE: FSIC) shares currently have a dividend yield of 9.90%. FS Investment Corporation is a business development company specializing in investments in debt securities. It seeks to purchase interests in loans through secondary market transactions or directly from the target companies as primary market investments. The company has a P/E ratio of 8.82. The average volume for FS Investment has been 747,000 shares per day over the past 30 days. FS Investment has a market cap of $2.2 billion and is part of the financial services industry. Shares are down 0.3% year-to-date as of the close of trading on Monday. EXCLUSIVE OFFER: See inside Jim Cramer's multi-million dollar charitable trust portfolio to see the stocks he thinks could be potential winners. Click here to see his holdings for 14-days FREE. TheStreet Ratings rates FS Investment as a hold. The company's strengths can be seen in multiple areas, such as its good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself. Highlights from the ratings report include:
- Net operating cash flow has significantly increased by 425.07% to $121.87 million when compared to the same quarter last year. In addition, FS INVESTMENT CORP has also vastly surpassed the industry average cash flow growth rate of -198.08%.
- The gross profit margin for FS INVESTMENT CORP is rather high; currently it is at 66.79%. 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 -11.73% is in-line with the industry average.
- Despite the weak revenue results, FSIC has outperformed against the industry average of 24.5%. Since the same quarter one year prior, revenues slightly dropped by 5.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- 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 Capital Markets industry. The net income has significantly decreased by 117.2% when compared to the same quarter one year ago, falling from $70.43 million to -$12.10 million.
- 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 Capital Markets industry and the overall market, FS INVESTMENT CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full FS Investment Ratings Report.
- TGH, with its decline in revenue, underperformed when compared the industry average of 2.7%. Since the same quarter one year prior, revenues slightly dropped by 7.3%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- The gross profit margin for TEXTAINER GROUP HOLDINGS LTD is currently very high, coming in at 84.75%. Regardless of TGH's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, TGH's net profit margin of -2.63% significantly underperformed when compared to the industry average.
- The debt-to-equity ratio is very high at 2.56 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Regardless of the company's weak debt-to-equity ratio, TGH has managed to keep a strong quick ratio of 2.35, which demonstrates the ability to cover short-term cash needs.
- 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. In comparison to the other companies in the Trading Companies & Distributors industry and the overall market, TEXTAINER GROUP HOLDINGS LTD's return on equity is significantly below that of the industry average and is below that of the S&P 500.
- Net operating cash flow has decreased to $70.58 million or 20.66% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
- You can view the full Textainer Group Holdings Ratings Report.
- The revenue growth greatly exceeded the industry average of 35.8%. Since the same quarter one year prior, revenues rose by 10.8%. 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.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Energy Equipment & Services industry and the overall market, SEADRILL PARTNERS LLC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- SEADRILL PARTNERS LLC's earnings per share declined by 7.1% 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, SEADRILL PARTNERS LLC increased its bottom line by earning $2.80 versus $1.72 in the prior year. This year, the market expects an improvement in earnings ($3.10 versus $2.80).
- Looking at the price performance of SDLP's shares over the past 12 months, there is not much good news to report: the stock is down 61.61%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- The debt-to-equity ratio is very high at 3.88 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, SDLP has a quick ratio of 0.67, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
- You can view the full Seadrill Partners Ratings Report.
- Our dividend calendar.