I already own these shares in my portfolio. But is now a good moment for me to purchase more? Or does the unusually high yield signal that Jupiter may be a value trap I should avoid?
Fund management woes
Jupiter is not the only fund manager that currently has an attractive-seeming yield. Rival M&G yields 9.5%. Abrdn is at 9.2%.
Set against those figures, the Jupiter yield does not look so unusual. But the fund management sector in general may be seeing a lack of investor confidence right now, pushing share prices down and dividend yields up.
On top of that, one specific concern I have about Jupiter is the outflow of funds. In the first quarter, customers pulled £1.6bn more from Jupiter funds than they put in. If a worsening economy leads more investors to reassess what they are doing with their money, outflows could grow. That is a risk to both revenues and earnings at Jupiter.
Jupiter dividend sustainability
If that risk comes to pass, could it be a threat to the current Jupiter dividend? I think the answer is yes, if the profit fall is big enough.
However, Jupiter has maintained its basic dividend over the past few years. It is true that it paid no special dividend last year, so the total payout per share fell. But that reflects a shift in strategy, with future excess capital return being in the form of share buybacks not special dividends. I actually think that could create value for shareholders given the current low price of Jupiter shares, down 47% in a year and trading on a price-to-earnings ratio below six.
Basic earnings per share last year came in at 27.6p. That comfortably covered the 17.1p per share dividend. If profits fall, coverage may weaken. But for now at least, I see no particular reason to expect a dividend cut soon.
My next move
I keep my portfolio diversified as a way to limit the impact if one share or indeed a whole business sector performs weakly. As my exposure to fund managers increases, I am conscious that the growing yields might signal that the sector is becoming a value trap. Maybe Jupiter has such a high yield because investors are dumping the shares in anticipation that continued customer withdrawals will lead to lower profits and a reduced dividend.
Although that is a risk, I do not see any specific reason for it to happen. For now, dividend coverage remains more than adequate. Jupiter has a strong brand and I think it has the resources necessary to attract clients even in a worsening economy. I think the share sell-off looks overdone.
The Jupiter dividend yield is very attractive to me. I am considering buying more of the firm’s shares for my portfolio, while making sure that I do not overexpose myself to the fund management sector.