Mullen Group Ltd.
(MTL-T) C$12.17
20% Dividend Increase Demonstrates Confidence in Outlook Event
Yesterday after market close, Mullen Group announced a 20% increase in its monthly dividend to $0.06/share from $0.05/share. The increase will be effective for the dividend payable on June 15, 2022.
Impact: SLIGHTLY POSITIVE
A 20% increase in the company's dividend will le ad to an impressive yield of 5.9% based on yesterday's closing price, and 4.4% based on our 12-month target price. The press release indicates that the increase is partly based on 'redirecting a portion of the annual free cash flow from the approved NCIB program'. The dividend will represent a payout ratio of 75-80% on adjusted EPS based on our 2022 and 2023 forecasts, and 38-42% on FCF.
We believe that this is an acceptable payout ratio that preserves enough cash to support financing any increases in capital expenditures. Mullen's debt is equal to 3.1x trailing EBITDA versus its comparables, which average approximately 1.1x. Although we believe that a dividend increase shows confidence with regards to the cycle and Mullen's ability to withstand spot pricing and volume pressure going forward, the market response could be tempered by a view that preserving excess cash for deleveraging could also be positive for the equity risk premium at this stage in the interest rate and economic cycle.
Mullen is navigating the challenges of equipment and labour shortages, cost inflation, and a potential softening in consumer demand by focusing on improving efficiencies, raising prices, and maintaining an opportunistic approach to potential tuck-in acquisitions. We believe that sector valuation multiples, which have reached historical lows, are discounting earnings downside that is unlikely due to structural changes and company-specific factors that we expect will persist for the next 2-3 years. As a result, we believe that the upside to our cargo transportation company share prices is attractive. Although we anticipate that the market will need time to get comfortable with each company's ability to prosper through cyclical weakening, we believe that multiples will start recovering before the end of our 12-month investment horizon.