Here's How We Evaluate Mortgage Advice Bureau (Holdings) plc's (LON:MAB1) Dividend
Is Mortgage Advice Bureau (Holdings) plc (LON:MAB1) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
With a four-year payment history and a 3.9% yield, many investors probably find Mortgage Advice Bureau (Holdings) intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Mortgage Advice Bureau (Holdings) for its dividend, and we'll focus on the most important aspects below.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Mortgage Advice Bureau (Holdings) paid out 90% of its profit as dividends, over the trailing twelve month period. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.
Consider getting our latest analysis on Mortgage Advice Bureau (Holdings)'s financial position here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the data, we can see that Mortgage Advice Bureau (Holdings) has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was UK£0.02 in 2015, compared to UK£0.23 last year. This works out to be a compound annual growth rate (CAGR) of approximately 85% a year over that time.
Mortgage Advice Bureau (Holdings) has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Mortgage Advice Bureau (Holdings) has grown its earnings per share at 34% per annum over the past five years. The company has been growing its EPS at a very rapid rate, while paying out virtually all of its income as dividends. Generally, a company that is growing rapidly while paying out a majority of its earnings, is seeing its debt burden increase. We'd be conscious of any extra risk added by this practice.
Conclusion
To summarise, shareholders should always check that Mortgage Advice Bureau (Holdings)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, it's not great to see how much of its earnings are being paid as dividends. Unfortunately, there hasn't been any earnings growth, and the company's dividend history has been too short for us to evaluate the consistency of the dividend. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Mortgage Advice Bureau (Holdings) out there.
Now, if you want to look closer, it would be worth checking out our free research on Mortgage Advice Bureau (Holdings) management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
