Hedge-fund manager Man Group promises to keep paying out its double-digit dividend.
This morning, hedge-fund manager Man Group (LSE: EMG) released its results for the nine months to the end of 2011. At the same time, the company confirmed that it would continue to pay chunky dividends to its shareholders, thus maintaining the highest dividend yield in the FTSE 100.
Man has origins dating back to 1783, making it one of the UK's oldest trading companies. Today, it is the world's leading listed manager of 'alternative investments' -- for which, read hedge funds.
At the end of 2011, Man managed $58.4 billion of assets, using a wide range of investment techniques. Although it is best known for sponsoring the Man Booker literary prize, the jewel in Man's crown is AHL Diversified, its huge macro hedge fund which employs a number of strategies in highly liquid futures markets.
In the last nine months of 2011, Man made $281 million in management fees and $37 million in performance fees, a total income of $318 million. After deducting $56 million of finance expenses and $69 million of adjustments, the FTSE 100 firm made a profit before tax of $193 million (£121 million).
This was in line with its estimates, but considerably below the $324 million Man made in the year ending 31 March 2011. As a result, adjusted diluted earnings per share (eps) came in at 10.7 US cents over nine months, comapred to eps of 27.6 cents in 2010/11.
Man's big problems
In common with other hedge-fund managers, Man's trend-following strategies are most profitable when markets move steadily in one direction or another.
Alas, 2011 was one of the most volatile years on record for equity and credit markets. This hit the performance of Man's funds and, therefore, its own profitability. Even so, Man's funds under management have continued growing so far in 2012, rising $1.1 billion to $59.5 billion, driven by positive investment performance that more than offset client withdrawals.
Man's biggest problem is that, as with other hedge-fund managers, it uses '2+20' fee structures. In other words, it collects a 2% annual management charge, plus 20% of yearly profits. However, Man can only collect performance fees when fund values exceed their high-water marks.
Thus, until Man's funds get past their previous peaks, it gets no performance fees. At 27 February, AHL was almost 11% below its high-water mark, so AHL needs to grow by more than 12 per cent to reach its previous peak. Only after this can Man start booking performance fees once more.
My Foolish friend Maynard Paton ran a ruler over Man's figures in this recent article.
Man's big attraction
Man's generally poor performance in recent years has sent its share price spiralling downwards. At one point in January, its shares fell as low as 103p, far below its 2007 peaks above 700p. As I write, Man's shares have leapt more than 6% to 139p, valuing the group at £2.6 billion.
Man's big appeal for investors is its hefty dividend, which is the highest in the blue-chip FTSE 100 index. However, as this cash payout is not fully covered by earnings, Man shareholders feared that it would be slashed.
Today, the group confirmed that it would pay out 100% of adjusted management fees in each financial year's ordinary dividend. In addition, net earnings from performance fees would be added to its $550 million surplus capital and distributed over time through higher dividends or share buybacks.
In other words, Man remains utterly committed to paying bumper dividends to its owners. In 2011, a final dividend of US 7 cents (4.4p) brings the total dividend to 16.5 cents (10p). For 2012, Man aims to pay out 22 cents (13.8p) in dividends.
In other words, Man shares trade on a forecast dividend yield of 10%. If its recent solid performance continues, and customer redemptions keep slowing, then higher earnings per share will help to underpin this double-digit dividend.
It certainly beats the 3% on offer from top savings accounts!
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