Right now, there are a number of high-yielding stocks on the London Stock Exchange. Abrdn (LSE: ABDN) – the asset management company formerly known as Standard Life Aberdeen – is one of them. It currently offers a prospective dividend yield of 9.8%.
Is this a dividend stock I should buy for my portfolio? Let’s take a look.
Should I buy Abrdn shares?
So the first thing I want to look at here is whether this is a high-quality business. These businesses tend to produce strong total returns (capital gains and dividends) for their investors over the long run. Low-quality businesses, by contrast, often experience share price losses and dividend cuts.
When it comes to the quality on offer here, I do have a couple of concerns. The first is in relation to the company’s market position and branding.
The asset management industry is highly competitive and I’m not convinced that Abrdn has a genuine edge. When I think of industry leaders, names such as BlackRock (iShares), Vanguard, and Fidelity come to mind. I don’t think of Abrdn. Meanwhile, the company’s recent name change – designed to appeal to younger investors – has attracted a lot of criticism.
My other concern is in relation to the company’s product performance. My research tells me that it hasn’t been very good lately. In 2021, for example, only 57% of Abrdn funds outperformed their benchmarks. By contrast, at Schroders, 74% of assets outperformed their benchmarks. For the five-year period to the end of 2021, the figure for Abrdn was 67%, which is a little better.
However, once again, this was well below Schroders’ performance, where 78% of assets beat their benchmarks. This poor performance could lead investors to move their money to other asset managers.
Given these issues on the quality front, there’s a chance the stock may not deliver good returns over the long term.
Is the dividend sustainable?
Zooming in on the dividend, I also have some concerns. My issue here is that dividend coverage – an indicator of dividend sustainability which is calculated by dividing earnings by dividends – is very low. For 2022, the projected ratio is just 0.67. This tells me that earnings are not set to cover the estimated dividend payout. In other words, the dividend could be at risk of a cut. If the dividend was to be cut, it could result in share price losses.
It’s worth pointing out that very high yields, such as the 9.8% on offer here, can be a signal that the market doesn’t believe the dividend is sustainable. Often when a company has a super high yield, it’s because the ‘smart money’ has already dumped the stock. This has pushed the share price down and the yield up temporarily.
My move now
Now there are some things to like here, of course. For example, the company is shifting its focus to real assets and alternatives, which are both seeing high demand from investors right now. It also announced a £300m share buyback recently. This could help boost earnings per share.
However, I don’t see enough appeal in the stock to buy it for my portfolio. All things considered, I think there are much better dividend stocks I could buy today.
