Shares in Standard Life Aberdeen (LSE: SLA) slumped last year, falling a total of 43.6% and making the stock one of the worst performers in the FTSE 100 as it wiped out several years of gains.
Heading into the year, Standard Life had outperformed the FTSE 100 by several percentage points per annum over the past decade. But after last year’s performance, since the beginning of 2009, the stock has underperformed the UK’s leading blue-chip index by around 1% per annum.
Today, I’m going to try and work out whether or not this slump will continue in 2019.
Overpriced
Before I try and establish that, I want to try and figure out why the shares lost nearly half of their value in 2018. It seems this is a valuation issue.
At the time of writing, shares in Standard Life are trading at a forward P/E of 10.5, that’s not particularly cheap or expensive in my opinion. City analysts are expecting the company to report a slight decline in earnings per share (EPS) of 6.6% for 2018 and based on this outlook, I think a mid-teens earnings multiple is suitable for the business.
With this being the case, I reckon the shares look slightly undervalued today.
However, Standard Life hasn’t always commanded such a reasonable valuation. In 2017, shares in the company changed hands for as much as 20 times forward earnings, which looks far too expensive for a boring old asset management business. Today the asset management sector as a whole is trading at a median P/E multiple of 11.8. Standard Life does deserve a slight premium to the sector average because of its size and reputation, but I think it’s very difficult to justify a valuation that is nearly double the industry average.
In other words, I think the market got ahead of itself in 2017, and it is no surprise that the share price has corrected since.
Dividend pressure
Another factor we need to consider here is Standard Life’s dividend yield. At the time of writing, the shares yield 9.7%, telling me that the market believes this distribution is not sustainable.
I’m inclined to agree. The City has pencilled in a dividend payout per share of 24.5p for 2018 and 25.2p for 2019 against EPS of 23.9p and 24.9p. These numbers indicate that the dividend distribution is not wholly covered by EPS, which means the company is paying out more than it can afford. With this being the case, it could only be a matter of time before management has to cut the distribution.
But even if the payout is cut in half to around 12.5p, the shares would still yield 4.8%, and dividend cover would rise to 2x. Standard Life would remain an attractive income investment.
The bottom line
Considering the above, I do not think that Standard Life’s share price slump will continue in 2019. After recent declines, the shares look cheap, and while concerns about the sustainability of the group’s dividend yield might be valid, even a 50% cut would still leave the company with an attractive yield.
