The FTSE 250 investment manager formerly known as abrdn has not only added a few more vowels to its name recently. The newly-renamed aberdeen group (LSE: ABDN) has also turned a 2023 £6m IFRS loss before tax into a 2024 £251m profit.
According to the 4 March results, this included an adjusted operating profit of £255m against last year’s £249m. It also incorporated a £92m gain on the sale of its European private equity business and a 34% drop in restructuring expenses to £100m.
This restructuring focuses on cutting costs (mainly in middle management) and improving product offerings for clients.
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I think the key risk here is that this restructuring falters at some point for some reason. That said, the firm now targets increasing profit by 18% within two years.
A passive income machine
I bought shares in the firm after its demotion from the FTSE 100 in September 2023. This automatically triggered heavy selling from tracker funds and those only able to invest in top-tier stocks.
As a share’s yield moves in the opposite direction to its price, this meant a huge rise in its dividend return. Looking at its dividend history and financials, I thought it highly likely that aberdeen would keep paying 14.6p a year.
After all, it had done so every year since 2020, including during another stint in the FTSE 250 in 2022. And analysts forecast it would continue to pay 14.6p in annual dividends from 2024-2027.
It did precisely that this year, which gives a yield on the current £1.74 share price of 8.4%. By comparison, the average FTSE 250 yield is 3.4% and the FTSE 100’s is 3.5%.
So, investors considering a £10,000 holding in the firm would make £13,096 after 10 years if the yield averaged the same. After 30 years on the same basis, this would rise to £113,200.
The total value of the aberdeen stake would be £123,200 by then. This would generate £10,349 a year in annual passive income by that point!
It is important to note that these returns are also based on the dividends being reinvested back into the stock. This is a standard investment practice known as ‘dividend compounding’.
Could there be a share price bonus too?
I never expected to make much money quickly on a rising aberdeen share price as well as on the dividends. But this has happened and there is much more room for appreciation in my view.
The firm’s 0.6 price-to-book ratio is very undervalued compared to its competitors’ average of 2.2. These comprise RIT Capital Partners at 0.7, M&G at 1.4, Bridgepoint Group at 2.7, and Legal & General at 4.1.
aberdeen group’s 13.2 price-to-earnings ratio is also very undervalued against its 41.5 peers’ average. And the same applies to its 2.3 price-to-sales ratio compared to the 3l.8 average of its competitors.
The discounted cash flow analysis I ran to ascertain the stock’s fair value shows it is currently 48% undervalued. Therefore, its fair value is £3.35, although market vagaries might push it lower or higher.
As I already have a large position in aberdeen from a much lower price, I will stick with that. However, if I did not have this, I would buy the stock as quickly as possible for its big yield and major share price potential.
