Down 40%+ but with a 10%+ yield! Time for me to buy this hidden FTSE 250 gem?

FTSE 250 investment firm abrdn was demoted from the FTSE 100 and has fallen 41% in a year. But now it looks very undervalued and has a 10.5% yield.

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FTSE 250 investment manager abrdn (LSE: ABDN) has been flashing on my personal stock investment screener since last July.

This is when its share price started to tumble on rumours that it would be demoted from the FTSE 100.

Is it undervalued?

Such a move meant that FTSE 100-tracker funds would have to sell their shares in the company. The same would apply to fund managers permitted only to invest in the highest credit-rated stocks.

The result would likely be a big fall in the company’s share price, regardless of any fundamental factors. This type of technical pricing readjustment is one thing I look for in a stock to buy.

abrdn was demoted and its shares are now selling for 41% less than they were last July. On the key price-to-book (P/B) measurement of stock value, it trades at just 0.5.

This is by far the lowest in its peer group, the average of which is 3.5. This says to me that they look undervalued.

Interesting as well is that abrdn was also demoted from the FTSE 100 in August 2022 — before being promoted again later that year.

During that period, its shares also collapsed on demotion, before spiking again when it was promoted back.

Is the business getting stronger again?

To warrant a promotion, abrdn will have to demonstrate that its business is getting stronger, and I think the signs are good.

After its relegation from the FTSE 100, it embarked on a £150m cost-cutting programme that included shedding 500 jobs. Much of this removed layers of management, which is always a good thing in my view.

It also sold off its US and European Private Equity businesses, allowing it to focus on investments, advisory, and the ii investment platform. These made adjusted operating profits of £50m, £118m, and £114m, respectively, in 2023, so the refocusing looks promising.

Overall, it made an adjusted operating profit last year of £249m. This was down from £263m in 2022, due to the upfront costs associated with restructuring.

The purchase of Tekla Capital Management’s healthcare funds looks like another good move to me. US healthcare expenditure per capita has grown at a compound annual rate of 6% since the 1980s.

The company might not be promoted, of course, and it may be that its restructuring fails to deliver over the long term. Another risk is that it might be unable to attract new net inflows to its funds.

However, consensus analysts’ expectations are now that its earnings per share will grow 55% a year to end-2026.

A dividend giant

Despite its demotion, abrdn kept its dividend at 14.6p a share. On the current share price of £1.39, this gives a yield of 10.5%.

This very high rate compares to a current average yield of 3.4% in the FTSE 250 and 3.8% in the FTSE 100.

This is a key reason why I have decided to buy the stock very soon.

Another is that I think the stock is already seriously undervalued against its peers. If it is promoted back to the FTSE 100, this undervaluation will look even more overdone.

And finally, I think both these reasons will continue to be supported by a business that looks to be growing stronger in my view.

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 no position in any of the shares mentioned. 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.

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