Yielding 6% and down 43% in price! Should I buy this FTSE 100 stock?

Even with its balance sheet risks, Oliver thinks this FTSE 100 company offers a compelling dividend yield and future growth prospects.

| More on:
Shot of a senior man drinking coffee and looking thoughtfully out of a window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Key Points

  • Schroders, down 43% in price, excels in asset/wealth management globally, particularly in the UK, Europe, and the Middle East.
  • Despite recent price drops and liabilities concerns, its high net income margin, growing revenue, and compelling 6% dividend yield make it an attractive addition for my portfolio at a forward P/E ratio of 12.
  • While mindful of its balance sheet risks and past 17.4% price decline over a decade, I like the current low valuation and have made it a watchlist candidate.

The FTSE 100 is full of many great companies, and I believe this is one of them. While I don’t think this investment is the greatest for price growth, it could be one of the best for dividends.

Schroders (LSE:SDR) is currently down 43% in price, and it yields a nice 6%.

Investing in asset management

Schroders offers asset and wealth management across the world. The largest geographies it operates in are the UK, Europe, and the Middle East.

Its asset management services, which are its largest source of revenue, include services in shares, as well as fixed income, multi-asset, and alternative investments.

I think it’s a strong choice

Schroders has numerous elements that I think make it a compelling holding for my portfolio. First of all, its net income margin, arguably the most important measure of a company’s profitability, is higher than the industry norm by a fair bit.

Also, while it’s not a high-growth company, and its net margin has fallen considerably recently, its revenue has been growing well over the past five years for a firm as large as it is.

Of course, the main selling point for me is its dividend yield, which has risen sharply recently, up from 3.4% in 2021 to nearly 6% as I write.

What about value?

With the price down so significantly recently, it’s no surprise that I think Schroders is selling at a decent valuation.

Its forward price-to-earnings (P/E) ratio, which takes into account analysts’ consensus estimates on future growth, is just 12.

After the contraction recently, the general outlook is that for the next three years, Schroders will grow its earnings at 3% annually.

I always love to buy during bad times because it means I get a low price. Then, I can capitalise on this during the good times.

There are significant risks

The biggest concern I have with the company at the moment is its balance sheet. While it is in asset management, and some firms have strategies that require a lot of liabilities, I don’t like it. There are also plenty of investment businesses that don’t have lots of liabilities, and I prefer to invest in those.

I don’t think the balance sheet is a deal breaker. It just means my allocation to the company may be slightly lower than if the issue weren’t there. After all, a lot of liabilities means a firm is closer to bankruptcy in the case of a major crisis. This is true even though the company has more than enough assets to cover its liabilities at the moment, as it makes its future financial situation less certain in the case of it having to sell a lot of its assets and maybe eventually take on some debt.

I have to remember that this is a company that has actually lost 17.4% in price over the past decade. So, if I do invest for the dividends, I need to be aware my asset value is less secure than I may like. That’s why buying it at the lower present price is more appealing to me.

It’s on my watchlist

Even given the risks, I think Schroders is a good company. The dividend yield is very compelling, and I’m considering investing in it.

I’ll want to get in early though, because I could see the price rising soon.

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.

Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended Schroders 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Revealed! One of the hottest growth, value, and dividend shares to buy today

This high-dividend, low-cost company is also one of the London stock market's most exciting growth shares, writes Royston Wild.

Read more »

Investing Articles

£20,000 in savings? Here’s how I’d target a £2,219 monthly passive income with FTSE 100 shares

Investing in FTSE 100 shares can be a great way to turn a regular investment into a life-changing passive income…

Read more »

Investing Articles

These are the most popular 2024 Stocks and Shares ISA picks so far

After a few tough years, it looks like the 2024 Stocks and Shares ISA season is getting off to a…

Read more »

Investing Articles

This FTSE 100 ETF may be the simplest way to become a stock market millionaire

Ben McPoland considers one very straightforward stock market investing strategy that could lead to a million-pound portfolio.

Read more »

Investing Articles

I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

These 2 magnificent FTSE 250 shares are on sale right now!

These FTSE 250 companies still look cheap, despite recent share price gains. Here's why our writer Royston Wild thinks they’re…

Read more »

Blue NIO sports car in Oslo showroom
Growth Shares

Down 36% in 2024, how low could NIO shares go?

The electric vehicle sector has seen some tremendous volatility in recent years, but what does the future hold for NIO…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

£5,000 in savings? Here is how I would invest in income shares

This Fool has been searching for ways to generate a passive return via income shares.

Read more »