News that Standard Life Aberdeen (LSE: SLA) plans to sell the majority of its insurance business to smaller rival Phoenix Group eclipsed SLA’s full-year results today.
The deal involves a cash consideration of £2.28bn and a shareholding of 19.99% in Phoenix Group, which will be part of an expansion and “significant enhancement” of the two firms’ existing long-term strategic partnership. The sale will see Standard Life Aberdeen disposing of its Standard Life Assurance Limited division but retaining its UK retail platforms and financial advice business. The two firms aim to continue to work together with Standard Life Aberdeen being Phoenix Group’s asset management partner for the business acquired by Phoenix.
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The pace of change is frenetic. Standard Life only just merged with Aberdeen Asset Management in 2017, but the directors explain that this new proposed transaction “completes the transformation to a fee-based capital-light business and is a major step towards the creation of a world-class investment company.” The question now becomes, do you want to invest in an investment company?
For what it’s worth, today’s full-year figures are a little pedestrian. Assets under management and administration were just 1% higher than the year before, fee-based revenue crept up almost 3%, adjusted diluted earnings per share came in broadly flat and the adjusted figure for cash generation sank by 6%. Undeterred, and in an expression of confidence about the firm’s future, the directors pushed up the full-year dividend by almost 7.5%.
The presence of a fat dividend yield is one of the first things that jumps out at you when you look at the stock. At today’s share price near 394p, the historical dividend yield sits at about 5.4% and the price-to-earnings ratio is about 13. Good value? Maybe, but following these big changes in the business, the firm has got it all to prove, I reckon.
Beware of the inherent cyclicality
I wouldn’t buy the shares just to harvest the dividend. Even after disposing of its insurance operations the company will remain in the wider financial services sector as an investment company, which means there will be a high degree of cyclicality in the enterprise. Cyclical firms have their place in the investment landscape, but I would not try to use them as vehicles for a long-term buy-and-hold investment strategy.
My guess is that the market will keep the firm’s valuation pegged low in the future and its dividend yield high. But there would be a good reason for that. At some point, the general economic sun will stop shining and firms such as Standard Life Aberdeen could see their profits plummet, which would not be good for investor dividends or the share price.
So I’m going to watch developments at the company with interest. But I don’t think the firm will be able to generate the evergreen cash flows that I’m looking for to back my retirement investments. The last thing I want is for the shares and the underlying business to be in a cyclical slump when I’m ready to draw on my retirement funds, which is why the fat dividend from Standard Life Aberdeen leaves me cold.