Who doesn’t like stocks that offer high dividend yields? Well, I don’t if there’s a chance those monster yields end up being cut!
Sadly, I think this is increasingly likely for a number of FTSE 250 members… but not all.
Primed for a cut?
Investment firm abrdn (LSE: ABDN) is one example where the income stream looks scarily excessive. Right now, shares have a forecast yield of 9.5%. For perspective, the FTSE 250 has a yield of 3.9%. So yes, I’d be getting a lot more than I would from a fund that merely tracks the index. But just how much risk would it involve?
Based on its recent half-year results, I think quite a lot. A pre-tax loss of £169m was reported as investors pulled their money from shares to sit in cash. That’s an improvement on the £326m loss in H1 2022 but hardly worth shouting about.
If this trend continues, I fear for the dividend. What’s more, another cut (payouts were last reduced in 2020) could put further pressure on a stock that is down nearly 20% already in 2023.
Courage required
In abrdn’s defence, the financial sector isn’t popular with investors at the moment. So there’s certainly an argument for thinking that a lot of negativity is priced in. In fact, a brave contrarian could possibly make a mint when the next bull market kickstarts. And one thing we do know is that markets have always recovered.
The trouble is, that could still be some way off. I’m not sure I’d want to lock up my hard-earned cash with Abrdn in the meantime.
Heavy faller
IT services provider FDM Holdings (LSE: FDM) is another FTSE 250 member whose dividend stream appears to be built on shaky foundations. It currently boasts a forecast dividend of 8.6%.
Once again, at least some of this is due to a plunging share price. Having set a record high just over two years ago, the company’s value has since crashed by around 70%!
I’m quite surprised by the scale of this drop. After all, FDM reported in July that revenue had climbed 18% to almost £180m in the first six months of 2023. Pre-tax profit also jumped 34% to nearly £30m.
That doesn’t sound like a business in crisis to me.
Better buy?
To be fair, the company did say ongoing geopolitical uncertainty “continues to disrupt the buying patterns of some clients“. Management also commented on a skills shortage “in all regions” in which operates. So even though FDM expects to deliver on market expectations for the full year, it’s clear there are some headwinds to trading. This helps to explain why the interim dividend was maintained at 17p per share rather than hiked.
Despite this pause, analysts are predicting that the payout will still barely be covered by profit. For this reason, I’m certainly not going to rule out a cut.
Notwithstanding this, the company has no debt and a history of generating great margins, free cash flow and returns on capital employed. These are just the sort of things I look for.
Personally, I would feel more comfortable buying this stock over abrdn, especially as both stocks trade at around the same valuation (12 times earnings).
