A 9.8% yield but down 20%! Is this FTSE 250 gem an unmissable passive income opportunity?

This FTSE 250 financial stock pays one of the highest dividends in any major FTSE index and looks very undervalued against its peers to me.

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I first purchased FTSE 250 investment manager abrdn (LSE: ABDN) shortly after it was demoted from the FTSE 100 last year.

I did so for two key reasons that I think are still in play.

The first is the huge yield on the stock, which is one of the highest in any major FTSE index. The second is what i see as the overdone fall in the share price.

Are the shares undervalued?

A wave of selling follows the demotion of a stock from the FTSE 100, regardless of any fundamental quality in the shares.

This is because funds tracking the leading index can no longer hold the relegated stock. The same applies to funds that are only mandated to hold top-rated, top-regulated FTSE 100 shares.

The same happened to abrdn, which leaves it 20% under its 15 December 12-month traded high of £1.86.

So now, on the key price-to-earnings (P/E) valuation, it trades at just 8.3. This is bottom of its group of competitors, which has an average P/E of 32.9.

abrdn is also bottom of the group on the price-to-book (P/B) valuation, currently trading at just 0.5. The peer group average here is 2.4.

Therefore, on both stock valuation benchmarks, it is very cheap.

A huge passive income generator

Since 2020, abrdn has paid an annual dividend of 14.6p a share. Analysts expect that it will pay the same amount this year, next year, and in 2026.

On the current share price of £1.49, this gives an annual yield of 9.8%. In stark contrast, the FTSE 100’s average yield is 3.6% now, and the FTSE 250’s is 3.3%.

Taking a round £10,000 as an example would produce £980 in dividends from abrdn this year. Therefore, over 10 years on the same average yield, it would be £9,800, and over 30 years £29,400.

Crucially though, the returns could be much higher if the dividends were used to buy more abrdn shares (‘dividend compounding’).

Using this method would make an additional £16,539 after 10 years at 9.8%, not £9,800. And after 30 years on the same basis, the extra would be £176,913 rather than £29,400.

With the initial £10,000 then added in, this would pay an annual passive income by that time of £18,317!

Will I buy more shares?

Following its demotion, abrdn embarked on a reorganisation aimed at reducing costs by at least £150m by end-2025. To this effect, it will cut layers of management and sell off underperforming businesses.

A key risk to the firm, then, is that this restructuring stalls for any reason.

So far though, it seems to be going well, in my view. H1 2024 results showed an IFRS post-tax profit of £171m against a £145m loss in the same period last year. Earnings per share also increased, as did assets under management.

Crucially as well, adjusted operating expenses were reduced by 13% — to £372m from £427m in H1 2023.

Therefore, given its very high yield and strong share price recovery prospects, abrdn looks to me an unmissable opportunity to me. Consequently, I will have no hesitation in buying more very soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Abrdn Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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