Are the Standard Life share price and 7.8% yield a top FTSE 100 bargain?

G A Chester discusses the valuation of FTSE 100 (INDEXFTSE:UKX) asset manager Standard Life Aberdeen plc (LON:SLA) and a FTSE 250 (INDEXFTSE:MCX) peer.

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A number of asset managers are currently trading on reasonable earnings ratings and juicy dividend yields. In the FTSE 100, Standard Life Aberdeen (LSE: SLA) sports a 7.8% yield. Meanwhile, the 6% on offer at FTSE 250 firm Jupiter Fund Management (LSE: JUP), which released a trading update today, also catches the eye.

Here, I’ll give my view on whether Standard Life could be a top Footsie bargain, and whether mid-cap Jupiter could also have investment appeal.

Valuation measures

Jupiter’s share price is little changed after its Q1 trading update. It said assets under management (AUM) increased £1.4bn to £44.1bn over the three months to 31 March. This was driven by positive market movements of £1.9bn, partly offset by a net £0.5bn of client withdrawals.

I mentioned reasonable earnings ratings and high yields, but I also find another measure of valuation useful for asset managers. This is market capitalisation as a percentage of AUM. I’ll come back to this after summarising some of the key earnings, dividend and AUM numbers in the table below.

  Recent share price (p) Market cap (£bn) AUM (£bn) Market cap % of AUM Price-to-earnings (P/E) ratio* Dividend yield (%)*
Standard Life 282p 6.9 608.1 1.1   14.0 7.8
Jupiter 385p 1.7 44.1 3.9 14.5 6.0

* Based on consensus forecasts

As you can see, Standard Life is somewhat cheaper than Jupiter on P/E, as well as sporting a higher dividend yield. But what of market cap as a percentage of AUM?

My rule of thumb is that I won’t buy if it’s above 3%. This is a tip I picked up from, I think, Nick ‘Britain’s Warren Buffett’ Train. I’ve found it a decent yardstick for avoiding overpaying for an asset manager’s shares, and, conversely, for spotting a potentially undervalued stock.

Signs of overvaluation

While Jupiter’s P/E is not unreasonable and its high dividend yield is attractive, the pricing of 3.9% of AUM is a big red warning sign for me.

And the company also rings alarm bells on something else I use as a general barometer of overvaluation and danger. This is the level of ‘short’ interest in a stock — institutions (typically shrewd hedge funds) positioned to profit if a share price falls, and to lose money if it rises.

Jupiter wasn’t among the most heavily shorted stocks at the start of this year, but positions have increased so sharply that it’s become the fifth most bet-against stock on the London market. Personally, if owned Jupiter shares I’d be inclined to sell them and bank my profits.

Good risk/reward proposition

Standard Life looks an attractive investment on paper. The P/E of 14, dividend yield of 7.8% and pricing of 1.1% of AUM, suggest there could be good value here. There’s also very little short interest in the stock.

However, the company has struggled with fund outlows, and these would have been worse if Lloyds/Scottish Widows hadn’t been barred from withdrawing a £100bn mandate until the contract ends in 2022. Having said that, even if we were to knock the £100bn off Standard Life’s AUM, the stock would still look cheap at 1.4% of AUM.

Finally, the dividend may not be the safest. As things stand, though, the City consensus is for modest increases this year and next, as the company comes through a period of transition. On balance, I see a good risk/reward proposition, and rate the stock a ‘buy’.

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.

G A Chester has no position in any of the shares 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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