Should You Or Shouldn’t You: A Dividend Analysis on Mortgage Advice Bureau (Holdings) plc (LON:MAB1)

Could Mortgage Advice Bureau (Holdings) plc (LON:MAB1) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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.

In this case, Mortgage Advice Bureau (Holdings) likely looks attractive to dividend investors, given its 3.4% dividend yield and five-year payment history. It sure looks interesting on these metrics – but there’s always more to the story . There are a few simple ways to reduce the risks of buying Mortgage Advice Bureau (Holdings) for its dividend, and we’ll go through these below.

Explore this interactive chart for our latest analysis on Mortgage Advice Bureau (Holdings)!

AIM:MAB1 Historical Dividend Yield, January 24th 2020
AIM:MAB1 Historical Dividend Yield, January 24th 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Mortgage Advice Bureau (Holdings) paid out 91% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

We update our data on Mortgage Advice Bureau (Holdings) every 24 hours, so you can always get our latest analysis of its financial health, 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 five years. During the past five-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 63% 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

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. It’s good to see Mortgage Advice Bureau (Holdings) has been growing its earnings per share at 34% a year 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

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re a bit uncomfortable with its high payout ratio. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Mortgage Advice Bureau (Holdings) out there.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for Mortgage Advice Bureau (Holdings) for free with public analyst estimates for the company.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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.

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. Thank you for reading.