FTSE 250 investment manager abrdn’s (LSE: ABDN) shares have dropped 27% from their July high this year.
This was mainly caused by it being demoted from the FTSE 100 at the end of August. However, this is also the key reason why I have been watching the stock so closely since then.
Why? When a firm is relegated from the FTSE 100, it is automatically dropped from funds tracking the top-tier index. Other funds that are only permitted to invest in the most-regulated, highest-credit-rated stocks also automatically sell demoted companies.
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Consequently, abrdn’s shares plummeted not because investors thought it was worth less overnight but because of automatic compliance regulations.
This suggests two things to me. First, the company may already well be worth more than the current share price reflects. And second, the shares may spike in the future if the company is promoted back to the FTSE 100.
This is precisely what happened in 2022, incidentally, when the firm was demoted in August and promoted in December.
The main risk in the shares remains that the cost-of-living crisis acts as a deterrent to new client business.
Core business poised for growth?
H1 results showed net operating revenue rose 4% compared to H1 2022. Adjusted operating profit increased by 10% to £127m over the period.
Diversification efforts also look to be paying off. The net operating revenue increase in H1 came from 2022’s acquisition interactive investor, for example.
The planned purchase of Tekla Capital Management’s healthcare funds also looks promising. US healthcare expenditure per capita has grown at a compound annual rate of 6% since the 1980s.
Analysts’ expectations are for annual earnings to grow by around 106% a year to the end of 2026. Earnings per share are expected to grow by about 109% a year over the same period.
Overall, analysts’ forecasts are that itwill become profitable within the next three years.
Double undervaluation compared to peers
abrdn is undervalued compared to its peers on two separate share price measurements.
On a price-to-book ratio (P/B) basis, it trades at just 0.6. Caledonia Investments is at 0.7, Bridgepoint Group at 2.5, St. James’s Place at 3, and Hargreaves Lansdown at 4.9. This gives a peer average of 2.8.
On a price-to-sales ratio (P/S) basis, it trades at 2. St. James’s Place is at 0.3, Hargreaves Lansdown at 4.7, Bridgepoint Group at 6.3, and Caledonia Investments at 11.5. This gives a peer average of 5.7.
Big dividend payer
In 2022, the firm paid a total dividend of 14.6p per share. Based on the current share price of £1.73, this gives a yield of 8.4%. By comparison, the current average FTSE 250 yield is 3.6%, and the FTSE 100’s is 3.9%.
Over 10 years, a £10,000 investment in abrdn would make an additional £8,400, provided the payout rate averaged the same. There would be tax obligations incurred according to individual circumstances, of course.
If I did not already have holdings in the financial sector, I would seriously consider buying abrdn shares now.
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.
