FTSE 250 investment manager abrdn (LSE: ABDN) has seen its shares drop 29% from their 12-month high on 20 July. Given that yields rise as share prices fall, the stock now yields 8.5%.
But a high payout alone is not enough for me to buy it. There are other reasons as well why it has caught my eye.
What’s behind the price drop?
The catalyst for the share price fall and what it may mean for the company going forward interests me.
The dramatic decline was caused by abrdn’s relegation from the FTSE 100 at the end of August. This happened because the shares had fallen 15% in the year to that point, reducing its market capitalisation by 25%.
Demotion to the FTSE 250 automatically resulted in FTSE 100-only tracker funds selling all their abrdn shares. Funds that are only permitted to invest in the highest-credit-rated stocks of the top index did the same.
Given this, it seemed to me that the shares might already be worth more than their new FTSE 250 price. It also meant that they might well spike if the company was readmitted to the elite index.
This had happened before, after abrdn had been demoted in August 2022, and then promoted again in December.
One risk in the shares is that the ongoing cost-of-living crisis acts as a deterrent to new client business. Another is that rising geopolitical issues attached to wars in Ukraine and the Middle East create especially volatile investment conditions.
A promising underlying business
The company’s H1 2023 results showed net operating revenue rise by 4% compared to H1 2022. This was driven by the 2022 acquisition of Interactive Investor.
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.
Overall, H1 2023 saw adjusted operating profit increase by 10% to £127m. And analysts’ expectations now are that earnings will grow by over 105% a year to the end of 2026. This compares to an industry average of just over 18%.
Earnings per share are also expected to increase — by at least 95% a year over the same period.
Doubly undervalued against its peers
The automatic devaluation of abrdn after the FTSE 100 demotion, has left its shares undervalued on two key measures.
On a price-to-book ratio (P/B) basis, it trades at just 0.6. Caledonia Investments is at 0.7, Bridgepoint Group at 2.7, St. James’s Place at 2.8, and Hargreaves Lansdown at 4.7. This gives a peer average of 2.7.
On a price-to-sales ratio (P/S) basis, abrdn trades at 1.9. St. James’s Place is at 0.3, Hargreaves Lansdown at 4.6, Bridgepoint Group at 6.8, and Caledonia Investments at 11.5. This gives a peer average of 5.8.
I already have several holdings in FTSE financial sector firms, so buying another would unbalance my investment portfolio. If I did not have these, I would seriously consider buying abrdn stock for three key reasons.
First, it has a high yield (8.5%). Second, I think its shares will gradually recoup their losses over time. And third, the core business looks to be on an uptrend.
