FTSE investment manager abrdn‘s (LSE: ABDN) share price is 32% lower than its 20 July high this year for a perfectly understandable reason. The end of August saw it demoted from the top-tier FTSE 100 index to the second-tier FTSE 250.
Such a demotion means it is automatically dropped from funds tracking the FTSE 100. Other funds that only invest in the most-regulated, highest-credit-rated stocks cut their investments in such firms as well.
Although I rarely invest in non-FTSE 100 firms for the same reasons, I do look at recently relegated stocks. The basic reason is that they still have much about them that belongs in the top tier. And so it is with abrdn, I think.
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Is the fundamental business sound?
The H1 results had good bits in them, as far as I am concerned. Net operating revenue rose 4% in H1 compared to the same period last year. And adjusted operating profit also increased – by 10% (to £127m) on last year.
Recent efforts at diversification also appear to be starting to pay off. This included last March’s acquisition of interactive investor, which accounted for the net operating revenue increase in H1.
Promising as well, I think, is the planned acquisition of the healthcare funds of Tekla Capital Management. US healthcare expenditure per capita has grown at a compound annual rate of 6% since the 1980s.
The risk of the company being demoted to the FTSE 250 is now largely priced in, I think. But another risk is that the cost-of-living crisis acts as a deterrent to new client business.
Undervalued on key metrics
abrdn currently trades at a price-to-book ratio (P/B) of just 0.5. This is lower than all but one of its peers — Petershill Partners at 0.4. Ashmore Group is at 1.4, Man Group at 2.2, and Hargreaves Lansdown at 5.1.
So, the company is undervalued on this metric compared to the peer group average of 2.3.
The same conclusion applies to its valuation on a price-to-sales ratio (P/S) basis as well.
abrdn’s P/S is the lowest of all its peers this time – bar none — at just 0.6. Man Group’s is 2.4, Hargreaves Lansdown’s 5, Ashmore Group’s 6.5, and Petershill Partners’ 10.1. The peer group average is 6.
Big passive income source
In 2022, it paid a total dividend of 14.6p per share. Based on the current share price of £1.61, this gives a yield of 9%. Its interim dividend this year is 7.3p and is the same as last year’s, so this suggests to me that the same total dividend will apply this year as well.
So, a £10,000 investment now would yield a further £900 this year. Over 10 years, provided the rate stayed the same, this would add £9,000 to the initial investment. This is over and above share price gains or losses and tax obligations incurred, of course.
I already hold several stocks in the financial sector, so buying more would unbalance it in my portfolio. If I did not hold them, though, I would seriously consider buying abrdn shares.
Not only do they offer an excellent yield, but they are also undervalued on two separate metrics to their peer group. This suggests to me that the share price may rise closer to these higher-valued stocks over time.
