An 8.9% yield but down 31%! This FTSE 250 stock looks cheap to me

FTSE 250 investment manager abrdn saw an automatic devaluation when it was relegated from the FTSE 100 but it looks undervalued now.

| More on:
Long-term vs short-term investing concept on a staircase

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For many investors, the FTSE 250 is the ‘sweet spot’ of UK share indexes. This has been reflected in its greater overall return since 1998 than the top-tier FTSE 100.

From the end of 1998 to the end of last year, the FTSE 250 achieved around double the overall return (yield plus price gains) of the Footsie.

That said, reporting and regulation are still slightly tighter in the FTSE 100. This is important to me as a now-middle-aged retail investor, rather than the investment bank trader I was.

Now, I only ever invest in companies outside the FTSE 100 if they have recently been relegated from it. My view is that they will still have some extra quality about them. And so it is with global investment manager abrdn (LSE: ABDN).

Positive elements in recent results

The H1 results had some good things in them, in my view. Net operating revenue rose 4% compared to the same period in 2022. Adjusted operating profit also increased – by 10% to £127m over the period.

Diversification initiatives also appear to be starting to pay off. This included the acquisition of interactive investor, which accounted for the net operating revenue increase in H1.

The planned purchase of Tekla Capital Management’s healthcare funds also looks promising. US healthcare expenditure per capita has grown at a compound annual rate of 6% since the 1980s.

Despite having been demoted to the FTSE 250 already, other risks remain in the shares. One is that the ongoing cost-of-living crisis may act as a deterrent to new client business. Another is that rising geopolitical risk around the Israel-Hamas War makes stable investment returns more difficult to produce.

Undervalued on two key metrics

The shares are now down 31% from their 20 July high.

It is very important to understand, though, that this is a standard valuation adjustment following relegation from the FTSE 100.

Such a demotion means it is automatically dropped from funds tracking the FTSE 100. Other funds that only invest in the most-regulated, highest-credit-rated stocks cut their investments in such firms as well.

This revaluation has left the company undervalued on two key metrics.

On a price-to-book ratio (P/B) basis, it currently trades at just 0.6 – lower than all its peers. Ashmore Group trades at 1.2, Man Group at 2.1, St. James’s Place at 2.9, and Hargreaves Lansdown at 4.7. This gives a peer average of 3.2.

On a price-to-sales ratio (P/S) basis, it trades at 1.9 – lower than all its peers except St. James’s Place (0.3). Man Group is at 2.3, Hargreaves Lansdown at 4.6, and Ashmore Group trades at 5.8. This gives a peer average again of 3.2.

This ‘double undervaluation’ suggests to me that the shares are currently underpriced.

Big passive income generator

In each of the last three years, the company has paid a total dividend of 14.6p per share. At the current stock price of £1.64, this gives a yield of 8.9%. So, a £10,000 investment now would make £890 this year in passive income.

I have holdings in the financial sector, but if I did not I would consider buying abrdn shares. Not only do they offer an excellent yield, but they are also undervalued on two separate metrics to their peer group.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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.

More on Investing Articles

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »