One FTSE 100 financial stock I’d buy and a FTSE 250 peer I’d sell

Businesses in this niche of the financial sector have natural market-beating potential. G A Chester discusses two of them.

| 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.

Simple funds that track indexes like the FTSE 100 and FTSE 250 are strong options for those investing in the stock market. However, it’s possible to earn superior returns by building a portfolio of individual stocks.

Asset management is one class of business with natural market-beating potential. Companies in this sector need relatively low capital expenditure and have high operational gearing. As such, provided they’re sensibly stewarded through lean times, they should act as leveraged plays on the long-term returns of the markets their funds are invested in.

Of course, as with all stocks, it’s wise to seek a reasonable valuation and margin of safety. With this in mind, let me explain why I’d buy blue-chip management group Schroders (LSE: SDRC) today. But sell mid-cap firm Jupiter Fund Management (LSE: JUP).

Earnings

Schroders has two share classes. One has the ticker SDR and the other SDRC. There’s no difference except that owners of the former have voting rights, while owners of the latter don’t.

It may make sense for big institutions to buy SDR, but I think small private investors are better off buying SDRC. The non-voting shares routinely trade at a significant discount to their voting counterparts. This gives buyers of SDRC the tangible benefit of a higher dividend yield.

I’ll come back to dividends. First, let’s look at the valuations of Schroders and Jupiter in terms of their earnings multiples. The SDRC shares are priced at 2,500p, as I’m writing, and JUP’s at 390p.

City analysts expect Schroders to post earnings per share (EPS) of 194.6p when it announces its 2019 results. As such, buyers are paying 12.8 times earnings. The EPS forecast for Jupiter is 28.5p, giving a multiple of 13.7.

I think Schroders’ cheaper rating is attractive, particularly as its earnings are forecast to increase 8% in 2020. Jupiter’s are forecast to decline 6%.

Dividends

Analysts expect Schroders to pay a dividend of 114p a share for 2019. This gives a yield of 4.6% on the SDRC shares (compared with 3.5% on the higher-priced SDR voting shares).

Meanwhile, analysts expect Jupiter to pay a dividend of 24.4p a share, giving a yield of 6.3%. While this is higher than Schroders, there are two things worth noting. First, Schroders’ dividend is covered a robust 1.7 times by EPS, compared with a skinny 1.2 times for JUP. Second, while Schroders’ payout is forecast to increase in 2020, JUP’s is forecast to fall.

Asset valuation

Finally, I like to look at an asset management company’s market capitalisation as a percentage of its assets under management (AUM). I’ve detailed this in the table below.

  Market cap (£bn) AUM (£bn) Market cap/AUM
Schroders (SDR + SDRC) 8.7 450.8 1.9%
Jupiter 1.8 45.1 4.0%

As a rule of thumb, I wouldn’t buy an asset management stock when it’s valued at above 3% of AUM. I consider Schroders undervalued at 1.9% and see scope for good upside.

In contrast, I consider Jupiter at 4% as overvalued and offering little margin of safety. I’d put current fair value for JUP’s shares at about 100p below where they are now.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders (Non-Voting). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »