Over the past year, the stock market has performed well, with the benchmark FTSE 100 index of leading companies growing by 22%. But financial services company Abrdn (LSE: ABDN) has increased by only 4% during the same period. Lately it’s been falling, losing more than a fifth of its value since March. Here I look at why the Abrdn share price is falling and whether I ought to add it to my portfolio.
Abrdn’s business performance
Abrdn is an investment company and so to some extent its fortunes are tied to the health of the financial services sector. But many financial services companies have outperformed Abrdn over the past year. Jupiter, for example, is up 7% while Schroders has added 25%.
Abrdn’s silly rebrand (from Standard Life Aberdeen, in July) has received a lukewarm reaction. But that alone doesn’t explain the lacklustre share price performance. I also don’t think its most recent financial performance has been bad. In fact I would say the business has been performing well. In its half-year results, the company reported a 7% growth in fee-based revenue. It also has a much improved profit picture. For example, the adjusted operating profit jumped 52% compared to the equivalent period last year.
Admittedly assets under management fell slightly. But overall I think the results show a company that is moving in the right direction. It maintained its outlook for the full year, and expects to cut its cost-to-income ratio further.
Dividends and the Abrdn share price
But not everything is rosy. The interim dividend was maintained. But the total dividend been “rebased”. Last year, the final dividend almost halved. So while the latest interim dividend has not fallen – or increased, for that matter – the company indicated that it plans to pay out a total annual dividend of 14.6p. In other words, the final dividend will remain at last year’s reduced level indefinitely.
That might not go on for ever. The company has said that it intends to start lifting the dividend again once coverage reaches 1.5 times adjusted capital generation. In the half-year period most recently finished, the coverage level on this basis was 1.14. While that is comforting as it means that the dividend is covered, it is also some distance from the target. If coverage continues around the current level, it may be some years before Abrdn even considers increasing its dividend again. Dividends are never guaranteed, so the dividend could fall further if the business runs into hard times. For example, if the decline in assets under management accelerates, that could hurt both fee revenue and profits.
Why I like the Abrdn share price
However, it’s also worth noting that even after last year’s cut, the current Abrdn dividend yield is 5.7%. That’s lower than some sectoral peers such as Legal & General and M&G – but it’s still well above the average yield for a FTSE 100 member such as Abrdn.
As well as the yield, the company has attractions to me including a well-established customer base and strong brands including Standard Life. If the economy contracts, customers could invest less and Abrdn’s profits may fall. But, even weighing the risks, I think the current Abrdn share price offers a buying opportunity for me. I would consider adding it to my portfolio.
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Christopher Ruane has no position in any shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management and Schroders (Non-Voting). 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.