In the FTSE 250, Ashmore (LSE: ASHM) stands out because of its big dividend yield.
The company operates as a value-oriented asset management firm focused on emerging markets.
And with the share price near, 173p, the forward-looking yield is just below 10% for the trading year to June 2024.
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Is the big yield a warning?
But when it comes to yields, biggest isn’t always best. Many investors view any yield above about 7% with suspicion. And the fear is usually that directors may slash dividends because of poor trading.
The financial record suggests Ashmore has been struggling. Dividends have been flat since at least as far back as 2018. And City analysts predict more of the same ahead.
However, the best income investments tend to have an underlying business that raises its dividend a little each year. And that outcome is usually backed by modest annual rises in revenue, earnings and cash flow.
But with Ashmore the trend for all those financial indicators has been down for several years. And that’s another red flag creating uncertainty about the company’s ongoing ability to keep up its dividend payments.
Meanwhile, the stock chart backs up a negative assessment. Since the beginning of 2020, the trend has been down.
So, reassurance in the statement released on 13 October 2023 would have been useful for investors. But recent trading has been tough.
In the first quarter, to 30 September 2023, assets under management decreased by $4.2bn – some 8% of the total.
That figure arose because of negative investment performance of $1.3bn and net outflows of $2.9bn.
Risk aversion
The company said net outflows were at a similar level as the prior quarter. And the directors think the situation reflects ongoing institutional risk aversion.
That’s interesting because risk-averse investment institutions are likely to be one of the reasons for the bear market in shares we’ve been seeing. For a bull phase in equities to really get going, it takes participation from deep-pocketed institutions.
Chief executive Mark Coombs said emerging markets were “rangebound” in the quarter and delivered slightly negative returns. But that came after three quarters of positive returns. And such a period of consolidation within a longer recovery cycle is “normal”.
Coombs thinks there are ongoing positive fundamental trends in emerging markets. And that situation supports the outlook for local bond and equity markets and provides an opportunity to take advantage of lower asset prices now.
Meanwhile, an investment now in Ashmore shares would be something of a contrarian play. If the returns from the company’s emerging market investments improve, institutions may be attracted back to the company raising the assets-under-management figure. And that could lead to higher profits and cash flow.
In the meantime, the directors haven’t flagged an imminent cut to the dividend. But if the business keeps declining, sustaining the current level of the payment may become harder for Ashmore.
