Is Marlin Business Services Corp.'s (NASDAQ:MRLN) 7.3% Dividend Sustainable?

By
Simply Wall St
Published
October 19, 2020
NasdaqGS:MRLN

Dividend paying stocks like Marlin Business Services Corp. (NASDAQ:MRLN) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Marlin Business Services is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. The company also bought back stock equivalent to around 9.7% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Marlin Business Services for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Marlin Business Services!

historic-dividend
NasdaqGS:MRLN Historic Dividend October 19th 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, Marlin Business Services currently pays a dividend. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Consider getting our latest analysis on Marlin Business Services' 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. The first recorded dividend for Marlin Business Services, in the last decade, was nine years ago. Its dividend has not fluctuated much that time, which we like, but we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past nine-year period, the first annual payment was US$0.2 in 2011, compared to US$0.6 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.9% a year over that time.

Marlin Business Services has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.

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. Earnings have grown at around 3.6% a year for the past five years, which is better than seeing them shrink! Marlin Business Services is paying out less than half of its earnings, which we like. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.

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. First, it's not great to see a dividend being paid despite the company being unprofitable over the last year. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. With this information in mind, we think Marlin Business Services may not be an ideal dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Marlin Business Services that investors need to be conscious of moving forward.

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

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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