When I received the request to look at the dividend safety of Medallion Financial(Nasdaq: MFIN), I knew what its rating would be before I even looked at the numbers.

When I checked out the company’s financials, my expectations were confirmed.

You see, I’ve followed Medallion for years…

In fact, I had been looking for a reason to recommend it in The Oxford Income Letter (my monthly newsletter dedicated to high-quality dividend payers) because I love contrarian, beaten-up stocks… as long as there’s reason to believe the company can realistically turn itself around.

But in Medallion’s case, I haven’t found that reason – so I haven’t recommended it.

Crushed by the Competition

Medallion, which used to go by the ticker symbol TAXI, makes loans to people who want to buy taxicab medallions in New York and Chicago.

The stock’s been falling steadily for nearly three years, setting up the perfect contrarian play – except for the one obstacle it can’t conquer.

Put simply, Uber and Lyft are crushing the taxi business.

Their ridesharing services are cheaper and more convenient than taxis – though taxi services in New York (and other major cities) now have mobile apps you can use to order a cab.

Because the taxi business is losing revenue to Uber and Lyft, medallion values have plummeted. In New York City, they used to cost more than $1 million. Today, they go for as little as $450,000.

In the case of the $450,000 medallion, the owner’s sales description specifies that the purchase price represents a fraction of the money owed to the bank.

In other words, the original loan is upside down.

And those loans are Medallion Financial’s problem.

The medallions bought with borrowed funds are worth less today than when they bought them… and in some cases less than what the cabbies owe for them.

And we know from the housing crisis nine years ago, when that happens, people walk away from their investments… and lenders get crushed.

A Rocky Dividend History

In the June quarter, the company had 22 loans in default. That compares

That’s concerning.

Medallion Financial pays a $0.05 per share quarterly dividend, which makes for an annual yield of 4.5%

In the first half of 2016, the company generated $8.5 million in net interest income (NII), the key metric used to analyze a bank or financial institution that makes money from loans.

NII is down 51% from the first half of 2015.

In the first half of 2015, it paid out $12.1 million in dividends, which was 70% of its NII. Normally, that would concern me, but that figure existed before the company slashed its dividend from $0.25 per share to $0.05.

At $0.05, there’s much more room for NII to decline before the dividend is in jeopardy.

So while the drastic haircut to the dividend was necessary, it also causes a big problem for its dividend safety rating.

It’s the fifth time management has cut the dividend in its 20-year history.

While there have been years when the dividend increased, the company’s founders have repeatedly shown a willingness to cut the dividend.

So you can assume they’ll do it again when they feel it’s necessary.

Revenue and NII are expected to plummet next year as medallion loans continue to dry up and default.

The company has expanded into consumer loans to diversify its loan portfolio. That may work in the long term, but if things continue to go south, don’t be shocked if it’s easier to find a cab – at rush hour in a rainstorm – than it is to get paid a dividend.

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