Image Source: Unsplash
 

The combination of an above-average dividend yield and a monthly dividend render Mullen Group (MLLGF) appealing to income-oriented investors. In addition, the company is one of the largest logistics providers in Canada, with an immense network and strong business momentum. In this article, we will discuss the prospects of Mullen Group.
 

Business Overview

Mullen Group is one of the largest logistics providers in Canada.  It started with just one truck in 1949 and has become an immense logistics provider, with 38 business units. It is headquartered in Okotoks, Alberta, Canada.

Its network of independently operated businesses provides a wide range of service offerings, including less-than-truckload, truckload, warehousing, logistics, transload, oversized, third-party logistics, and specialized hauling transportation.  In addition, the company provides diverse specialized services related to the energy, mining, forestry, and construction industries in western Canada, including water management, fluid hauling, and environmental reclamation.

Mullen Group operates in four business segments: Less Than Truckload, Logistics & Warehousing, Specialized & Industrial Services, and the U.S. & International Logistics segment.

The Less Than Truckload segment is the largest first and final-mile network in western Canada and Ontario.

Source: Investor Presentation

This segment is tied to consumer needs and offers delivery services with controlled temperatures throughout the delivery. It has 11 business units, more than 75 terminals, and more than 5000 points of service. This segment performs more than 3 million deliveries every year.

The Logistics and Warehousing segment has 11 business units and is focused on North America.

Source: Investor Presentation

This segment has approximately 20,000 subcontract trucks and operates under an integrated technology platform.

As a logistics company, Mullen Group is sensitive to the underlying economic conditions and hence it is vulnerable to recessions. The company incurred a 22% decrease in its earnings per share in 2020 due to the fierce recession and the supply chain disruptions caused by the coronavirus crisis.

However, thanks to the massive distribution of vaccines worldwide, the pandemic has subsided and the economy has recovered. As a result, Mullen Group has fully recovered from the pandemic. It exceeded its pre-pandemic profits in 2021 and posted 9-year high earnings per share of $1.20 in 2022.
 

Growth Prospects

Mullen Group tries to grow its earnings in many ways. It seeks opportunities to expand its network, but also it tries to optimize its existing operations and minimize its costs in order to enhance its operating margins. Overall, management has preferred enhancing operating margins instead of gaining market share at all costs.

On the other hand, the company has failed to grow its earnings per share over the last nine years. In fact, it has incurred an 18% decrease in its earnings per share over this period, primarily due to the depreciation of the Canadian dollar vs. the USD. Investors should also be aware that the company is likely to face a fading tailwind from the strong economic recovery from the pandemic, as the aggressive interest rate hikes of central banks in response to sky-high inflation have caused an economic slowdown. Overall, given the solid business model of Mullen Group but also its lackluster performance record and the economic slowdown, we expect approximately flat earnings per share five years from now.
 

Dividend & Valuation Analysis

Mullen Group is currently offering an above-average dividend yield of 4.9%, which is more than triple the 1.6% yield of the S&P 500. The stock is thus an interesting candidate for income-oriented investors but U.S. investors should be aware that the dividend they receive is affected by the prevailing exchange rate between the Canadian dollar and the USD.

Mullen Group has a payout ratio of 39%, which is healthy. In addition, the company has a strong balance sheet. Its interest expense currently consumes only 16% of its operating income while its net debt is at $535 million, which is only 54% of the stock’s market capitalization. As a result, the company is not likely to cut its dividend significantly anytime soon.

On the other hand, it is important to note that Mullen Group has significantly reduced its dividend over the last decade. To be sure, the company has offered a dividend of $0.50 over the last 12 months. This dividend is 56% lower than the dividend of $1.13, which the company offered in 2013.

The significant dividend reduction has resulted not only from the depreciation of the Canadian dollar vs. the USD but also from a decline in the earnings per share of the company amid volatile business performance. To cut a long story short, Mullen Group is offering an above-average dividend yield of 4.9%, but it is prudent for U.S. investors to expect minimum dividend growth going forward.

In reference to the valuation, Mullen Group is currently trading for 9.1 times its earnings per share in the last 12 months. Given the strong business model of the company but also its volatile performance record, we assume a fair price-to-earnings ratio of 10.0 for the stock. Therefore, the current earnings multiple is somewhat lower than our assumed fair price-to-earnings ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 1.9% annualized gain in its returns.

Taking into account the flat earnings per share, the 4.9% dividend yield, and a 1.9% annualized expansion of valuation level, Mullen Group could offer a 5.8% average annual total return over the next five years. This is a modest expected total return, and hence we recommend waiting for a significantly lower entry point in order to enhance the margin of safety and increase the expected return from the stock.
 

Final Thoughts

Mullen Group has a dominant position in its business thanks to its immense network. However, the company has exhibited a volatile performance record and has failed to grow its earnings per share over the last nine years. Therefore, investors should make sure to establish a wide margin of safety before investing in this stock.

Mullen Group is offering an above-average dividend yield of 4.9%. The company has a solid payout ratio of 39% and a strong balance sheet. As a result, its dividend should be considered safe, though investors should not expect meaningful dividend growth anytime soon. Overall, the stock seems almost fully valued right now, and hence investors should wait for a more attractive entry point in order to enhance their future returns.

Moreover, Mullen Group is characterized by extremely low trading volume. This means that it may be hard to establish or sell a large position in this stock.

More By This Author:

Monthly Dividend Stock In Focus: Atrium Mortgage Investment Corp.
Monthly Dividend Stock In Focus: Extendicare
Monthly Dividend Stock In Focus: Pizza Pizza Royalty Corp.