A few calculations suggest the forecasts may be optimistic.
I'm pretty sure Man (LSE: EMG) has cropped up on the radars of many income investors of late. Trading at 130p, the shares of the hedge-fund group offer a potential 10% dividend yield -- if you believe the City's payout predictions.
But as we all know, ultra-high dividend yields do come with risk. Even though brokers may be predicting a healthy payout, the wider market obviously has its doubts about this particular FTSE 100 share. Will Man's dividend be cut? I've taken a closer look to find out.
Dividend projections
First off, here are some basic stats about Man.
- The group has 1.8 billion shares in issue, so at 130p the market cap is £2.3 billion.
- The group reports its profits and declares its dividends in US dollars, which I've translated at £1:$1.58.
- Consensus estimates for the dividend are currently 17 cents (10.8p) per share for 2011 and 22 cents (13.9p) per share for 2012.
- Going on the 2011 estimate, the shares currently offer an 8.3% yield, while the 2012 estimate supports a 10.7% yield.
In terms of potential dividend coverage -- that is, by how much those predicted payouts could be covered by profits -- Man's recent results are not encouraging.
In particular, figures for the six months to September 2011 showed underlying earnings per share of 8 cents, which, when doubled up, gives us 16 cents -- and less than that aforementioned 17 cent prediction. Meanwhile, Man's figures for the year to March 2011 showed earnings per share of 17 cents -- which, if repeated, would just cover a 17 cent payout.
Do my own research
But what about future profits? Well, the beauty of a fund-management business such as Man is that ordinary investors like us can have a good go at estimating possible earnings and dividends ourselves.
You see, sales at a fund manager are generally produced from taking a management fee from client portfolios, while costs mostly relate to staff. So if you know:
- how much money the fund manager is managing;
- what percentage fee the fund manager takes from that money, and;
- what the cost base is...
...you can deduce a profit figure, from which you can estimate a dividend.
So for Man, my sales sums look like this:
| Fund | Management fee % | Value ($b) | Management fee ($m) |
|---|
| Guaranteed | 4.60 | 10.0 | 460 |
| AHL | 3.20 | 14.5 | 464 |
| GLG | 1.53 | 11.0 | 168 |
| Institutional | 1.26 | 12.2 | 154 |
| Long only | 0.81 | 10.7 | 87 |
| Total | | 58.4 | 1,333 |
I found Man's five fund categories and their associated fee levels within November's interim results, while the latest value of client funds held in each category was published last month. Taken together, I reckon Man's annual sales could be running at $1,333 million.
Costs and earnings
Now to costs, which I've simply extracted from the interim results. As far as I can tell, underlying first-half expenses were $607m, so I reckon annual costs could be twice as much at $1,214 million. However, Man has said it expects to make savings of $75m in the next year or two, so perhaps costs should be more like $1,139m.
And to keep things simple -- and be somewhat generous towards Man -- I've ignored the firm's financing costs and then applied tax at the low 17.5% seen in the last results. All in all, I calculate earnings could be $160m...
| | $m |
|---|
| Sales | 1,333 |
| Costs | (1,139) |
| Operating profit | 194 |
| Tax | (34) |
| Earnings | 160 |
... or about 8.8 cents or 5.6p per share. Going on this profit calculation, the aforementioned dividend estimate of 22 cents/13.9p for 2012 does look very optimistic to me.
Even adding in some performance fees -- say, a repeat of last year's underlying $144m following strong client returns -- brings my earnings guess to only about 15 cents/10p per share.
As such, I can't see how Man can really pay out the forecast 10% income unless:
- funds under management rally strongly;
- management fees are raised significantly;
- costs reduce further, and/or;
- bumper performance fees are collected.
All of that could happen, of course, but I see such events as 'possible' rather than 'likely' -- especially in what remains a tricky financial market.
(Alternatively I may have missed something in my sums, and I'll be more than happy to read your corrections in the comment box below!)
Back to the balance sheet
Underpinning Man's dividend and those City forecasts of late has been the firm's strong net cash position. Last month Man confirmed its net cash stood at $600 million, equivalent to 33 cents/21p per share, which seems adequate to sustain a hefty payout for a year or so.
However, I can't see the cash pile being enough to make the 10% forecast a genuine long-term prospect. In fact, going on my 15 cent/10p per share earnings calculation, perhaps a 6p per share dividend could be a more sustainable -- giving a 4.6% yield. Not bad in today's market, and quite possibly what current Man shareholders might want to prepare for.
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