Is Aberdeen Asset Management plc a better dividend stock than J Sainsbury plc & Royal Mail plc after today’s update?

Should income-seekers ditch J Sainsbury plc (LON: SBRY) and Royal Mail plc (LON: RMG) in favour of Aberdeen Asset Management plc (LON: ADN)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today’s first-half update from Aberdeen Asset Management (LSE: ADN) hasn’t been well-received by the market, with the investment manager’s shares falling by around 7%. That’s because Aberdeen has reported a fall in net revenue of 20% versus the first half of the prior year, with its underlying pre-tax profit declining by twice that.

The main reason for such a disappointing performance has been weakness in emerging markets. Looking ahead, further challenges can’t be ruled out in the short-to-medium term, which is a key reason why Aberdeen’s bottom line is due to fall by 37% in the current year. And while it’s investing in bolt-on acquisitions as well as in strengthening its own balance sheet, Aberdeen’s dividend is coming under pressure.

While Aberdeen has maintained its dividend for the half-year and expects to record substantial cost savings moving forward, its dividend is due to be covered just once by profit this year. In other words, all of the company’s profit is forecast to be paid out as a dividend and while this may be possible in the short run, it can’t be sustained in the long run as all businesses require a degree of reinvestment.

However, with Aberdeen yielding 7.1%, it appears as though the market has already priced in a dividend cut. As such, it remains a very appealing income play which would still yield 3.5% even if dividends were halved. And with the potential for rapid growth in emerging markets in the coming years, Aberdeen remains a highly appealing, albeit rather uncertain, income stock.

Challenging outlook

Another company with an enticing but yet relatively risky dividend is Sainsbury’s (LSE: SBRY). It currently yields a more modest 3.7% but unlike Aberdeen its dividends are covered more than twice by profit.

Looking ahead, Sainsbury’s is due to report a fall in its bottom line over the next couple of years, but if the Home Retail acquisition goes ahead then it could act as a positive catalyst and lead to better performance for Sainsbury’s than the market currently anticipates. But with a lower yield than Aberdeen and a challenging outlook, Sainsbury’s seems to be a less obvious income choice for the long term.

Income pick

Meanwhile, Royal Mail (LSE: RMG) is also a strong income play, with it currently yielding 4.7% from a dividend covered 1.7 times by profit. As such, it seems to offer a relatively high yield, while also having much more headroom than Aberdeen when making payments to its investors. This shows that while Aberdeen may cut dividends, Royal Mail looks likely to increase them at a brisk pace over the coming years.

Furthermore, with Royal Mail due to increase its earnings in each of the next two years, it seems to be facing less difficult trading conditions than Aberdeen or Sainsbury’s. This means that its business performance and share price performance may be less volatile, thereby making Royal Mail the best income option of the three stocks discussed here.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Aberdeen Asset Management, Royal Mail, and Sainsbury (J). The Motley Fool UK has recommended Aberdeen Asset Management. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »

Investing Articles

Could this be the FTSE 100’s best bargain for 2025?

The FTSE 100 is full of cheap stocks but there’s one in particular that our writer believes has the potential…

Read more »