3 reasons why I expect this FTSE 100 dividend stock to bounce back

Looking for undervalued FTSE 100 (INDEXFTSE: UKX) dividend shares? Rupert Hargreaves thinks you need look no further than this proven income hero.

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Shares in St. James’s Place (LSE: STJ) have plunged in value over the past three months, falling 17%, excluding dividends, compared to the FTSE 100’s decline of just 9%. 

And as the stock has dipped, St. James’s dividend yield has spiked. The shares now yield 5% and trade at a multiple of just 18 times 2019 earnings — below the five-year average of 33.

Here are three reasons why I believe this multiple is too low, and it’s only a matter of time before investors return to the business.

Market leader

St. James’s is, in my view, the UK’s leading wealth manager. Other companies out there, such as Nucleus Financial Group (LSE: NUC) have built a niche for themselves, but none are as established as St. James’s.

Nucleus is one of the company’s newest rivals. Technically, this business doesn’t manage money for clients. It provides a so-called ‘wrap’ platform for wealth managers to manage investments for their own clients. By aggregating all of the back office functions, Nucleus is using economies of scale to offer a better service for all stakeholders.

Steady growth

The second reason I believe it is only a matter of time before shares in St. James’s stage a rally, is the firm’s rate of growth. 

City analysts believe the group is on track to report earnings per share (EPS) growth of 63% for 2018, followed by an increase of 21% in 2019. However, recent numbers from the firm suggest that it may miss these lofty targets. A trading update earlier this week showed net inflows increased by 7% for the third quarter, a sharp slowdown from the 21% growth reported for the first half of 2018. 

Still, while the slowdown is disappointing, there’s no denying that St. James’s is heading in the right direction. What’s more, asset flows tend to be cyclical, so it’s more than likely that they will recover when the market’s performance improves.

Nucleus’ growth is on a similar trajectory. At the end of the third quarter, the company’s assets under administration (AUA) were £14.7bn, up 8.1% year-to-date, and up 14% over the previous year. That’s impressive growth considering the FTSE All Share Index has fallen 2.2% over the same period.

Meanwhile, the number of investment advisors actively using the platform has risen 7.2% over the past 12 months, and customer numbers have grown by 6.4%.

Modest valuation

My third and final reason why I believe St. James could outperform is the company’s valuation. 

As I mentioned above, the shares in the group are currently trading at a near 50% discount to its five-year average. If AUA growth starts to pick up again, and the company closes in on City growth targets, I reckon this discount will narrow over the medium term.

Shares in Nucleus, on the other hand, look relatively expensive. The company earned 5.4 p per share last year, and 2.8p per share for the first half of 2018 which, according to my calculations, puts the stock on a historical and forward P/E of 29.6 and 28.7, respectively. 

Even though the company might have a bright future, for me, this multiple leaves too much to chance and doesn’t give a margin of safety if growth stumbles, although it would appear management doesn’t seem to mind. Nucleus’ chairman and CTO have bought stock recently. Maybe they know something we don’t?

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

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