Abrdn (LSE: ABDN) shares are currently yielding 5%. As an income-hungry investor, this is certainly attractive. What’s more, the stock is dirt-cheap. It has a current price-to-earnings (P/E) ratio of 8x.
But as much as the income is appealing, should I buy Abrdn shares just for the dividend yield? In short, I wouldn’t. I don’t think the investment case for a stock can solely be based on the income. In my opinion, the underlying business should be displaying some growth as well.
A lot of things are happening at the asset manager right now. So I’ve place it on my watch list. Here’s why.
Change
The fund manager was formed through a 2017 merger of Standard Life and Aberdeen Asset Management. But since then, things haven’t been great.
There’s been a lot of change at the company. The firm was formerly known as Standard Life Aberdeen but it has been rebranded to Abrdn, a move that attracted a lot of critical comment.
Stephen Bird, the new CEO took over the role last September. He’s trying to turn around the company. So far he has carried out the rebranding to improve the firm’s clarity and focus. He has also put in place a new management team, which could drive and improve the growth of each division. Bird is also implementing costs savings and is simplifying the business by selling non-core assets.
This is all well and good. But will it result in higher revenues and profits? It’s still very early days for the strategy, too early to assess its progress. But it could work and I’ll certainly be watching Abdrn’s transformation closely.
Results
Abrdn shares took over a 2% hit yesterday after it released its half-year results. Fee-based revenue improved by 7% compared to last year. But it still suffered £5.6bn of net outflows. This was a slowdown compared to the total outflows of £24.8bn in the first half of 2020.
Funds under management are key for the firm. But outflows have been a persistent problem since the merger. Abrdn needs to convince its clients that its funds are the best place to park their money. And the only way it’s going to do this is by improving the investment performance of its products.
If Abrdn can’t do this then its clients will invest with another asset manager. And the industry is extremely competitive.
Dividend
As I said before, the appealing thing about Abrdn shares is the dividend. But my concern is that the income isn’t covered by profits. And if the firm is still suffering from fund outflows, this could impact any future payments.
Abrdn is focused on building returns for shareholders. But it has rebased the annual dividend to 14.6p and will grow it when the income is “1.5x covered by adjusted capital generation”. In a nutshell, this isn’t going to happen any time soon.
Should I buy?
The stock is on my watch list. Abrdn’s turnaround won’t happen overnight. And it needs to fix its investment performance to reduce fund outflows. Until I see evidence of this, I’m not buying the shares just for the income.
