Investors in wealth management and financial services have seen a volatile few years. Many may know St James Place (LSE:STJ) as a dividend stock for its generous yield of over 8%. However, I’m surprised it’s not spoken about as much as some of the others in the FTSE 100. So is this potentially a must-have for investors looking to build passive income?
Background
The company is a publicly owned investment manager, managing equity, fixed income, and balanced mutual funds for its clients. The shares have had a rough few years amid a regulatory overhaul, intense competition, and volatility in the bond market.
Changes to transparency rules and fee structures of wealth management firms are expected to cost the company £150m by 2025. This has clearly spooked investors somewhat, but I sense the 50% drop in the last year is an overreaction.
However, as interest rates are expected to cool off, the coming years could be a more friendly environment to operate in.
The dividend
Despite the decline in the share price, the company has continued to pay a very generous 8.26% dividend per year. This is clearly attractive to potential dividend stock investors. However, I always want to assess whether the business overall is in good shape before investing. If there are rocky fundamentals under the surface, and the dividend is cut suddenly, the share price could easily collapse.
Risks
There are a couple of concerns for me here, namely that the dividend is not covered by cashflow. If there is another period of volatility, there may be questions of whether the dividend needs to be reduced to a more conservative level.
The company has strong cash reserves to cover any near-term concerns. But since markets tend to look further into the future for dividend stocks, the share price could still suffer from declining fundamentals.
Future outlook
With new CEO Mark FitzPatrick at the helm since December, the company will be hoping for improvements over the coming years. Analysts seem to be optimistic on this, with one suggesting:
“Significant EPS cuts, long-term fee pressure, and a high cost of equity, reflecting uncertainty under a new charging structure, already appear priced in.“
UBS Analysis
The company expects earnings to decline annually by about 0.7% over the coming years, well behind the average of the sector at 18%. However, the return on equity — reflecting the level of efficiency in the business — is pretty impressive at 29%, eclipsing competition with an average of only 8.1%.
As a potential dividend stock investment, it feels like most of the worst-case scenario has already been reflected in the share price. A discounted cash flow calculation indicates the fair value of shares are 50% higher than the current price. The price-to-earnings (P/E) ratio of 9.6 times also sits well below the average of the sector at 20.2 times.
Am I buying?
There could well be serious potential for this dividend stock, but with the business clearly in the process of trying to turn around following a difficult few years, I don’t want to be taking any chances. Despite the dividend being rather attractive as a passive income, I think there are less risky investments out there. I’ll be staying clear for now.
