In the past, I’ve been positive on the outlook for the Standard Life Aberdeen (LSE: SLA) share price. However, recently, my opinion of the company has started to change as it’s looking increasingly out of place in the rapidly changing wealth management industry.
Rapidly changing market
Standard Life merged with Aberdeen Asset Management with the goal of building a wealth management powerhouse. The dealmakers believed that the two businesses would be able to achieve strong economies of scale, leading to higher margins and better profits.
Although the two companies have benefitted from synergies, this hasn’t translated into higher earnings. In 2019, management announced that total cost savings would hit £400m by the end of 2020. Unfortunately, City analysts are expecting net income across the combined groups to fall by £17m, from £455m in 2019 to £438m in fiscal 2020.
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The problem is, it seems Standard Life’s offering not longer appeals to customers. Current estimates suggest investors pulled £33bn from the company’s funds last year. That’s equivalent to 6.5% of assets under management.
If these estimates are correct, it will confirm Standard Life’s offering not longer appeals to customers and investors are rushing out of the firm’s funds into lower-cost passive offerings.
Hidden value
We’ll have to wait until Standard Life publishes its full-year results later this year to see if these figures are correct. If they are, the business looks expensive at current levels. It’s dealing at a price-to-earnings (P/E) ratio of 16.5 at the time writing. That’s a premium valuation for a shrinking business.
Still, as I’ve noted before, there are many parts to Standard Life, including its Indian business and stake in FTSE 100 peer Phoenix. When these assets are stripped out, the valuation does look more appealing. City analysts reckon the core business is trading at a low-teens multiple when you remove these none-core businesses.
Nevertheless, while there’s hidden value in the business, the decline of the group’s core operating unit is concerning.
Asset sales continue
For the time being, Standard Life can continue to sell its non-core assets. These sales are helping the business bolster its balance sheet and fund its attractive dividend yield. The stock currently offers a dividend yield of 7%.
But these asset sales can only continue for so long. As such, if earnings continue to fall, there’s a good chance the company could cut its dividend. This could cause a sudden, negative re-rating of the stock.
With this being the case, Standard Life no longer appears to be the rock-solid income investment it once was.
Therefore, if it’s income investments you’re looking for, it might be better to search elsewhere in the FTSE 100. There are several other companies with better growth prospects that offer dividend yields of 5% or more in the index that seem undervalued right now.
