For investors looking to make some extra cash, I think FTSE 250 stocks are a great option.
I’ve been viewing the index and one stock’s caught my eye. I want to investigate it further. It’s financial services provider abrdn (LSE: ABDN).
A meaty yield
As I write, the stock boasts an impressive 9.5% dividend yield. That’s the seventh highest on the FTSE 250. On paper, that may seem incredibly attractive. But there are a few questions I must answer before I know whether the stock’s a smart buy for making passive income.
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Is it sustainable?
The first is how reliable its the dividend? A high yield on the surface isn’t always sustainable. Take FTSE 100 giant Vodafone as an example. It recently announced plans to slash its 11.4% dividend in half from 2025.
There are a few ways I can go about exploring this. One is by looking at its dividend coverage ratio. For abrdn, this reveals the first red flag. Its dividend’s currently covered around 0.95 by earnings. A ratio of two or above often signals a dividend’s secure. Clearly, abrdn misses that by some distance.
A flagging share price
The second is how has its share price been performing? Sometimes yields can also be pushed significantly higher by a falling share price. That’s the case for abrdn.
While the stock’s been gaining momentum in the last month, rising 9.1%, in the last 12 months, it’s lost 24.8% of its value. The last five years have seen 42.1% shaved off its price.
While a flagging share price can be an opportunity to snap up a bargain, I don’t see this as the case with abrdn. Its revenues have been declining for the last few years.
There have also been large swings in its net income and cash flows. That further adds to the uncertainty surrounding its dividend.
Not all down and out
Of course, that doesn’t mean I couldn’t be wrong. There’s a lot to admire about the stock. Firstly, it’s a business with strong brand recognition and a large customer base operating in an industry expected to experience rising demand.
On top of that, its Q1 results also showed glimmers of hope. For the period, assets under management and administration grew 3% to £507.7bn. Interactive Investor, which it acquired in 2021 for around £1.5bn, also saw total customers rise 3% to 414,000 from 401,000 the year prior.
The business is aware of the changes it needs to make, including cutting costs. Speaking about abrdn’s strategy, CEO Stephen Bird said the firm’s cost transformation programme was making good progress as the company looks to restore “a more acceptable level of profitability”.
A savvy buy?
So with its enticing yield could abrdn be a savvy buy for investors looking to generate passive income today? I’d say not.
There are things to like about the stock. But I see too many issues. I think there are better options on the FTSE 250 for investors to explore ahead of it.
