Is this 10.5% dividend yield too good to be true?
Even after the FTSE 250 jumped 15% over the last 12 months, there are still plenty of chunky dividend yields on which to capitalise. And among the highest payouts in the UK’s second-leading index belongs to abrdn (LSE:ABDN).
If I were to buy shares today, it would instantly unlock a 10.5% dividend yield, generating £10.50 for every £100 invested. Considering the market average yield’s usually between 3% and 4%, seeing shareholders rewarded so generously is pretty exciting. But high yields have a habit of not lasting. So is this truly a fantastic income opportunity, or is the double-digit yield only temporary?
Investigating the yield
It’s important to remember one of the primary influences on a stock’s yield isn’t the dividend but rather the share price. When a stock takes a tumble, yields rise. And that’s precisely what’s going on with abrdn.
The asset management enterprise hasn’t exactly been on a great run of late. And while there were some encouraging signs of recovery in its interim results, investors were once again left disappointed following its third-quarter earnings. Consequently, the share price crashed almost 25% in the second half of October.
Assets under abrdn’s management remain steady, growing by 2% to £507bn, thanks to stronger stock market performance and improving investor sentiment. However, the problem lies with the firm’s net outflow. Despite better market conditions, clients are still withdrawing their funds especially in its Advisor segment. And year-to-date around £4.5bn of net cash outflows have occurred.
Management’s acknowledged this problem and has already started taking steps to try and resolve it with a particular focus on improving client experience and well as adjusting pricing to remain competitive. At the same time, its recently-acquired Interactive Investor segment’s generating net cash inflows helping offset the lacklustre performance of its other divisions.
So while £4.5bn is leaving Abrdn’s ecosystem, it’s significantly less than the £13.5bn suffered a year ago over the same period. But what does this all mean for dividends?
The income opportunity
Management remains confident it will deliver £60m of annual cost savings by the end of 2024, up to £150m before 2026. That’s good news for profit margins. And if the firm can plug the hole causing net outflows, the firm’s top line might also finally get back on track.
Sadly, dividends weren’t mentioned in the latest quarterly earnings, suggesting they’re not a high priority right now. And the latest analyst forecasts don’t expect any further dividend growth before 2026. Therefore, dividends are likely to remain frozen at 14.6p for a few more years.
That does suggest the 10.5% is here to stay. But if net outflows persist, the abrdn share price could fall much further. And personally, given management’s mediocre track record over the last few years, I’m not willing to give it the benefit of the doubt for my portfolio without seeing further progress.
The post Is this 10.5% dividend yield too good to be true? appeared first on The Motley Fool UK.
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More reading
- Here’s how I’d aim to turn £9,000 of abrdn shares into £1,960 a month in passive income!
- Yielding 10.6% after a 20% decline, are abrdn shares simply too cheap to ignore?
- Here are 2 of the FTSE 250’s biggest dividend forecasts
- The abrdn share price has crashed 18% in a week, lifting the yield to a mind-blowing 10.35%!
Zaven Boyrazian has no position in any of the shares mentioned. 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.
