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Is the 8.8% Dividend From Mullen Group Ltd. for Real?

Founded as a trucking company in 1949, Mullen Group Ltd. (TSX:MTL) has grown from a single-truck operation to one of the biggest in Canada. While the company’s stock doesn’t get as much attention as it should, shares have had a return six times higher than that of the TSX overall over the past 20 years. Since Mullen’s IPO in 1993, a $100 investment would have been worth over $2,000 today.

A big part of shareholder returns hasn’t just been capital gains, but dividend payments. Over the past six years alone, Mullen has paid out about $600 million in dividends, nearly half the current market cap. The income stream has grown too from a yield of around 5% in 2011 to its current level of 8.8%.

Is this an opportunity to buy a long-term winner with an incredibly attractive income stream?

Punished for being related to oil

One of Mullen’s biggest source of profits is providing various services to the oil and gas sectors of Canada. The company actually owns several independently operated businesses that provide energy companies anything from drilling-related services to crude shipping and water management systems. The recent collapse in energy prices has caused investors to sell off Mullen stock by 30% in just 12 months. This selloff is one of the factors driving up the dividend yield.

Revenues and profits will certainly be under pressure as drilling activity is already down since the beginning of the commodity bear market, and nearly every producer is looking to cut capital costs even further this year. Both sales and earnings for Mullen’s Oilfield Services segment should be down roughly 50% in 2015 compared with 2014.

Is it all that bad though?

Mullen is actually navigating the current turmoil fairly well, especially relative to the energy producers themselves. One of the company’s biggest advantages is its diversified business streams; about half of total company sales and profits come from shipping and logistics provided to customers outside the energy sector. Earnings in 2015 for this segment actually improved over the year before.

The benefits of having diversified business lines cannot be stated lightly, especially when dealing with volatile markets like the oil and gas industry. For example, when oil prices plummeted in 2008 from over $120 a barrel to under $40, Mullen’s profit margins remained stable. Over the past decade margins have stayed between 19% and 21% every single year. Clearly, the company can navigate market turbulence while still creating massive shareholder value.

Does that make the dividend safe?

Mullen’s business is clearly not as volatile as the market thinks. The dividend, however, may not be as reliable. Earnings for the next 12 months are expected to come in at $0.72 a share with dividend payments amounting to $1.20 a share. While Mullen has plenty of cash on hand, limited debt, and impressive free cash flow, the dividend isn’t safe if current conditions continue.

Still, shares may prove to be a solid long-term investment, but owning the stock solely for its income may not turn out well. However, if you’re looking for market bargains that have great track records and a sustainable business model, Mullen shares are for you.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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