Investors who bought shares of Standard Life Aberdeen (LSE: SLA) expecting a stable share price and a regular income may feel disappointed.
These shares have fallen by about 25% since the merger between Standard Life and Aberdeen Asset management completed in August 2017. With the stock now yielding 7% — often a warning sign of problems ahead — shareholders may be wondering how much further the shares will fall.
Standard Life Aberdeen has come up on my own value investing screens recently. I haven’t hit the buy button yet, but I am getting close. Today I’ll explain why I think these shares could offer serious value.
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Two overlooked events
Things have changed since last year’s merger. One big change is that the group’s insurance business has been sold to FTSE 250 firm Phoenix, in a deal valued at £3.24bn. The sale saw Standard receive a 19.99% shareholding in Phoenix and a cash payment of £2.34bn.
Management intends to return a total of £1.75bn of this cash to shareholders, via £750m of buybacks and a £1bn B share scheme (worth about 34p per share in cash). In addition, Standard Life Aberdeen is left with a shareholding in Phoenix that’s worth about £1bn.
A second change is that in August, India’s HDFC Asset Management Company floated on the Bombay Stock Exchange. Standard has a 30% shareholding in this business, which was worth about £1.3bn following the flotation.
Too cheap to ignore?
If we deduct the value of the Phoenix and HDFC investment holdings from Standard Life Aberdeen’s £9.4bn market cap, we get a valuation of around £7.1bn for the group’s remaining asset management business.
This part of the business is expected to generate adjusted net earnings of over £700m this year, putting the shares on a 2018 forecast P/E of about 10, with an expected dividend yield of 7%.
Although the group is still struggling with fund outflows, I believe the shares are probably too cheap at this level. I may buy a few for my own share portfolio.
A small-cap alternative yielding 6%+
If you feel that large companies like Standard Life Aberdeen are hard to understand and slow to turn around, then you might want to consider City of London Investment Group (LSE: CLIG) instead.
Like Aberdeen Asset Management, this £109m group has historically focused on emerging markets. Results out today show that funds under management rose by 10% to $5.1bn last year.
Revenue was 8% higher at £33.9m, while pre-tax profit was 10% higher, at £12.8m. Shareholders will receive a total dividend of 27p per share, an increase of 8% from last year.
This payout gives the stock a dividend yield of 6.7%, underlying the group’s core attraction for investors.
An under-the-radar star?
Today’s results include a handy summary of the company’s performance since its flotation in 2006. The shares have risen by 123% from an issue price of 180p to 403p today. But regular generous dividends mean the total return to shareholders since listing is now 377%.
This is a very impressive performance over 12 years, in my opinion.
For income investors who are worried that they might miss out on capital gains, this proven small-cap performer could be worth considering. I’d certainly be happy to add these shares to my own portfolio.
