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." Capitala Finance Dividend Yield: 12.60% Capitala Finance (NASDAQ: CPTA) shares currently have a dividend yield of 12.60%. Capitala Finance Corp. is a Business Development Company specializing in investments in traditional mezzanine, senior subordinated and unitranche debt, second-lien loans, equity securities issued by lower and traditional middle-market companies, and small and middle-market companies. The company has a P/E ratio of 82.67. The average volume for Capitala Finance has been 61,500 shares per day over the past 30 days. Capitala Finance has a market cap of $235.2 million and is part of the financial services industry. Shares are up 21.5% year-to-date as of the close of trading on Wednesday. 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 Capitala Finance as a sell. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity and generally disappointing historical performance in the stock itself. 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 when compared to that of the S&P 500 and the Capital Markets industry. The net income has significantly decreased by 142.4% when compared to the same quarter one year ago, falling from $9.87 million to -$4.19 million.
- 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. Compared to other companies in the Capital Markets industry and the overall market on the basis of return on equity, CAPITALA FINANCE CORP underperformed against that of the industry average and is significantly less than that of the S&P 500.
- The share price of CAPITALA FINANCE CORP has not done very well: it is down 9.82% 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. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
- CAPITALA FINANCE CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from 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, CAPITALA FINANCE CORP turned its bottom line around by earning $0.99 versus -$0.27 in the prior year. This year, the market expects an improvement in earnings ($1.88 versus $0.99).
- The gross profit margin for CAPITALA FINANCE CORP is currently very high, coming in at 71.32%. 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 -24.00% is in-line with the industry average.
- You can view the full Capitala Finance Ratings Report.