Why Is Mullen Group Ltd. a Screaming Buy?

Mullen Group Inc’s (TSX:MTL) 5.3% dividend yield and strong financial position provides downside protection for investors.

| More on:

Mullen Group Ltd. (TSX: MTL) is one of Canada’s largest specialized oilfield services and transportation/logistics companies, made up of 26 independently operated businesses.

In the oilfield services segment, which accounts for approximately 65% of EBITDA, Mullen offers a broad range of specialized services, such as hauling crude oil, rig moving, drilling mud storage, warehousing, and handling and storage of oilfield fluids. The trucking/logistics segment, which accounts for the remainder of EBITDA, offers general freight services to customers in Canada, the United States, and Mexico.

Along with many others, this is a company that is going through hard times due to the difficult economic environment. However, this is exactly where the opportunity lies, because Mullen Group is not the only company going through difficult times, but it is relatively unique in its industry due to its financial strength and flexibility and its diversity. It is this that gives it the opportunities that, in my view, will enable it to emerge from this difficult time a bigger and stronger company.

Strong balance sheet and safe dividend

Mullen currently has $91 million in cash, with a debt-to-total capitalization ratio of 31%. The company recently raised $400 million debt and now has over $500 million in financial flexibility at its disposal to invest in growth.

While the company’s dividend and capital expenditures were not fully covered by cash flow generation in recent results, Mullen is seeking growth opportunities in order to grow cash flow. Furthermore, the company has more than doubled its dividend in the last four years and has taken steps to take a lot of the cyclicality out of its business and created a diversified business model that has achieved relatively steady margins for a company in its businesses.

In the oilfield services segment, for example, it has moved away from drill rig moving toward growing the pipeline, specialized service and fluid hauling operations, all of which are less cyclical and experiencing stronger and steadier long-term growth rates at this time.

Operating costs

Fuel is 8.5% of operating costs. With Brent oil down to less than $88 per barrel and down 25% since June, this will have a positive impact on companies such as Mullen Group as fuel costs decline. Although the magnitude of the decline in gasoline prices has not been as extreme, they have started to move lower. And with the risk of crude declining further, there may be bigger relief at the pump going forward.

Acquisitions

Mullen has the financial strength and inclination to acquire in order to grow the business, seeing that organic growth will be more difficult in this low-growth environment. As such, Mullen’s strategy in the next few years will be highly focused on profitable growth through acquisitions. It will focus on the trucking industry and continue to invest only in accretive acquisitions. The company is no stranger to this strategy and has a good track record of making highly profitable acquisitions in the past. Longer term, Mullen will benefit from the growth of the LNG and water handling industries in Canada.

With valuations in the sector and the market in general falling, it will be a good time for Mullen to pick up some assets. As management has stated, consolidation needs to happen in the trucking industry in order to find synergies and greater scale. On the oilfield services side, management will get more aggressive with acquisitions when there is more clarity that pipelines will be built.

Kriska: A new transportation and logistics company

Mullen recently reached an agreement with privately held Kriska Holdings Ltd. to invest in the creation of Kriska Transportation, which will be a new growth oriented transportation and logistics company. This agreement will position Mullen to participate more fully in the consolidation in the Ontario trucking industry.

In times of economic weakness and stock market corrections, investors can scoop up quality companies that will take advantage of the weakness and create opportunity. Mullen is one such company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any stocks mentioned.

More on Dividend Stocks

warning or alert
Dividend Stocks

Attention, Cautious Investors: This Top Dividend King Just Climbed 7% and Can Keep Going

Fortis (TSX:FTS) stock is still down 10% in the last year but up 7% on strong earnings that demonstrate more…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

T-Shirt Titan Gildan Drops 6% as CEO Feud Continues: Buy the Dip?

Gildan (TSX:GIL) stock dropped even further after investors saw negative momentum that could be attributed to the company's new CEO.

Read more »

Dividend Stocks

3 Overlooked High-Yielding Dividend Stocks to Buy Right Now

When we talk about high-yielding stocks, energy and telecom giants pop up. Here are three high-yielding stocks you could consider…

Read more »

A meter measures energy use.
Dividend Stocks

How Much Will Fortis Pay in Dividends This Year?

Fortis stock is a good buy for conservative investors, especially on meaningful market corrections.

Read more »

stock analysis
Dividend Stocks

Where to Invest $10,000 in May 2024

Here's how Canadian investors can create a portfolio consisting of stocks, ETFs, GICs, and gold with $10,000 in 2024.

Read more »

money cash dividends
Dividend Stocks

How Much Will BCE Pay in Dividends This Year?

BCE Inc (TSX:BCE) has a big dividend yield. How much will it pay out this year?

Read more »

Question marks in a pile
Dividend Stocks

How Much Will Bank of Nova Scotia Pay in Dividends This Year?

Bank of Nova Scotia (TSX:BNS) stock has a 6.66% dividend yield.

Read more »

TFSA and coins
Dividend Stocks

2 Magnificent Dividend Stocks I Plan to Add to My TFSA in May

Are you looking for some dividend stocks for your May TFSA contributions? You might want to check out these two…

Read more »