The abrdn (LSE: ABDN) share price has climbed more than 50% in the past six months. But there are things that make me think the stock is still cheap.
It’s a big rise. But abrdn shares are down 50% over five years. I’d say we’re still in the dip. But we need to look at what’s behind it.
Merger
The company was formed from the merger of Standard Life and Aberdeen Asset Management in 2017. I liked both companies at the time.
So when two good companies merge, the result is even better, right? Not in this case, not at first. They just didn’t seem to gel, and a good few investors pulled their funds.
And then Lloyds Banking Group moved a bunch of its pension assets away. That helped bring the 2022 year to an end with a loss.
Dividends
But as a sign of hope in the future, the dividend was still paid. In fact, the board plans to keep the dividend at 14.6p per year until earnings are strong enough to grow it.
Right now, that’s a yield of 7%. The thought of the same each year until it can start to rise again does tempt me, for sure.
There’s a clear risk, though. You know, the best laid plains of mice and men and all that. Just because the bosses want earnings to grow enough to pay bigger dividends doesn’t mean it will happen.
Still, it looks as if City analysts like it. They seem to think that profits will return and remain fairly stable for the next two or three years.
Growth?
We don’t see that one key thing yet, though. The abrdn board is looking for earnings to cover dividends by 1.5 times before growth is back on.
But that’s not in the forecasts yet. We’re looking at break-even cover at best for the next year or two.
But these are hard times for those in the asset business. Inflation, high interest rates, a weak stock market… they all make things tough for a company like abrdn.
So to look at today’s valuation and assume it represents the long term would be a mistake, I think. And that valuation puts a price-to-earnings (P/E) ratio of around 16 to 19 on abrdn shares over the next few years.
Cheap
If that’s how the market values abrdn at such a low point in its business cycle, then I think the market has got it wrong. It’s not a no-brainer-buy P/E ratio. But I think it looks cheap.
What swings it for me is that dividend. Now, I hope the plan to keep it going doesn’t tempt fate too much. There has to be a real chance that it won’t come off.
And if the board has to back down from it any time in the next two or three years, I think the abrdn share price could tank.
But on balance, that 7% per year puts abrdn on the potential buy list for me.
