The Abrdn (LSE: ABDN) share price has fallen by more than 50% since Standard Life merged with Aberdeen Asset Management in 2017. But the group’s latest results showed a return to growth for the first time since the merger.
Abrdn shares are up by nearly 15% from their March lows. At current levels, they offer a tempting 7% dividend yield. Is it finally time for me to consider buying this unloved FTSE 100 stock for my income portfolio?
Recent news looks positive
Newish CEO Stephen Bird says that 2021 was “our reset year”. He’s confident that the group is “delivering on our strategy for growth”.
Profit from continuing operations rose by 17% to £995m last year, helped by lower costs. Investors continued to withdraw money from Abrdn’s funds, but net outflows shrunk to £6.2bn, from £29bn in 2020.
Investment gains meant that the overall value of Abrdn’s assets under management and administration (AUMA) rose by 1% to £542bn.
Bird is hoping to find fresh growth by targeting new areas such as private assets and retail investors. I think these moves make sense, but these are competitive markets. I suspect that the company’s growth rate and profit margins will remain under pressure. This could limit share price gains.
One particular concern for me is that Abrdn doesn’t have any obvious specialisms. As a mid-sized generalist in a competitive market, I think the group could continue to struggle to attract new client funds.
Is the dividend safe?
One of the big attractions of this stock for me is the 7.4% dividend yield. Abrdn’s long share price fall means it’s one of the highest yields in the FTSE 100. However, such high yields can be an indicator that a dividend is at risk of being cut.
One simple indicator that Abrdn’s dividend might be stretched is that last year’s payout of 14.6p was more than the company’s adjusted earnings of 13.7p per share. If the dividend is not covered by earnings, this is a sign that the payout might not be sustainable.
However, it’s worth remembering that for various reasons, a company’s profits aren’t always the same as the cash it generates.
That’s true here. Abrdn generated an operating profit of £323m last year, but the group reported capital (cash) generation of £366m. Based on this figure, Abrdn’s payout was covered 1.2 times last year.
Bird plans to increase this cash cover to 1.5 times before increasing the dividend. I’d guess this means that shareholders should expect several more years of flat payouts, assuming things go to plan (they might not).
Abrdn share price: what next?
I’m reassured by Abrdn’s improved performance last year. The numbers suggest to me that Bird may finally have found a way to deliver the cost savings and benefits of scale that were promised by the 2017 merger.
On the other hand, I’m disappointed that Abrdn didn’t manage to attract net inflows of customer cash in such a strong year for the stock market.
What’s my verdict? On balance, I think the Abrdn share price may have reached a turning point and could continue to rise. But I think the business will continue to face tough competition from rivals.
Overall, I’m not excited by Abrdn shares right now. Unless the situation changes, I won’t be adding this stock to my portfolio.
