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A excessive dividend yield’s a double-edged sword — the potential positive factors are enticing however could possibly be an indication of deeper points.
Sinking money right into a failing firm only for dividends can finish in catastrophe. A declining share worth can result in dividends being reduce and shareholders being left empty-handed. So it’s greatest to rigorously assess an organization’s prospects earlier than getting too excited in regards to the yield.
A struggling inventory
One firm I’ve had my eye on for a while is asset supervisor abrdn (LSE: ABDN). This 200-year-old firm lately fell upon onerous occasions. Earlier than shortening its identify and dropping its vowels, the corporate identify was Customary Life Aberdeen, the results of an £11bn merger between Aberdeen Asset Administration and Customary Life.
After a number of years of losses, the newly-merged firm assigned a brand new CEO and shortened the identify. It additionally started a three-year programme to chop prices and recoup losses.
However, to this point, the outcomes have been disappointing. abrdn decreased its dividends by a 3rd in 2020 and has stored them steady since. In that point, the worth has fallen 54%, resulting in an inflated yield.
In 2022, the corporate purchased the software program platform Interactive Investor for £1.5bn. For a quick second it appeared promising, with the shares gaining 50% in This autumn 2022.
But it surely didn’t final.
So the place to from right here?
There have been some small indicators of enchancment recently. The value is up 10% since this yr’s low in April. On this yr’s first-half outcomes, earnings per share (EPS) exceeded analysts’ expectations, as much as 9.2p from a 7.7p loss in H1 2023.
Income was down 8.7% however earnings elevated by £316m. General, it was an excellent consequence in comparison with earlier years.
However forecasts stay pessimistic. Earnings are anticipated to say no 45% within the coming 12 months, leading to a ahead price-to-earnings (P/E) ratio of 15.7. The trade common is presently 12.8, so the share worth may battle to push greater.
Nonetheless, the latest return to profitability’s an excellent signal. Contemplating that dividends had been steady for 3 years, it appears much less seemingly they’d be reduce now. That makes the present low worth and excessive yield a gorgeous prospect.
However provided that issues preserve bettering.
Contemplating the larger image
abrdn’s not the one one struggling. Fellow asset supervisor Ashmore Group‘s down 61% up to now 5 years. Even main Prudential spin-off M&G‘s struggled to make any vital positive factors since 2020.
In a market commentary word in 2022, abrdn highlighted the Russia-Ukraine battle and the Truss administration’s funds catastrophe as causes for its struggles. Again then, recession fears had been excessive however extra lately, these have been downplayed.
The Ukraine battle rages on however the economic system’s improved considerably since. The Financial institution of England enacted its first rate of interest cuts earlier this yr as inflation begun to subside. Then, final week, Prime Minister Starmer warned of probably “painful” tax will increase to be introduced within the upcoming October funds.
Subsequently, enterprise leaders’ confidence dropped.
That would sluggish abrdn’s progress. Whereas I just like the yield and the route the corporate’s headed, I’ll wait till after the October funds announcement earlier than deciding whether or not to purchase.
