FTSE 250 investment manager abrdn (LSE: ABDN) is down around 38% from its 12-month 20 July high.
This is almost entirely the result of the selling automatically triggered when it was demoted from the FTSE 100 last August.
FTSE 100-tracker funds were no longer able to hold the shares. Nor were funds mandated only to have the highest-credit-rated FTSE 100 stocks in their portfolios.
However, it was precisely after this wave of selling had taken place that I first became interested in the stock.
A worse company overnight?
Big price moves on an overnight technical readjustment do not make a company fundamentally worth less, in my view.
To me, this meant that an essentially FTSE 100 company was trading at a huge discount to where it should be.
It also meant the adjustment could just as easily work the other way around – if it was promoted back again.
Exactly this had happened before. In August 2022, abrdn was also demoted from the FTSE 100 before being promoted again in December that year.
During that period, its shares also collapsed on demotion, before spiking again when it was promoted back.
As it now stands, it looks undervalued to me, even in the FTSE 250. 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 3.3.
Is it set for strong growth?
A key factor in abrdn’s demotion from the FTSE 100 was outflows of assets under management (AUM).
However, a Q1 2024 update showed its AUM was starting to rise again – by 3% year on year, to £507.7bn.
Continued growth was shown in its interactive investor business – also up 3% in customer numbers over the same period.
Another area likely to provide strong growth in my view will be Tekla Capital Management’s healthcare funds. Four of its NYSE-listed healthcare and biotech closed-end funds were bought by abrdn last year.
US healthcare expenditure per capita has grown at a compound annual rate of 6% since the 1980s.
A risk to the stock is that its AUM may reverse into the red again. Another is a new global financial crisis.
However, consensus analysts’ expectations are now that its earnings will grow by a stunning 55% every year to end-2026.
The big reward for patience
In many cases, waiting for a company’s growth to be reflected in its stock price is a miserable experience. It can also be a major ‘opportunity cost’, with money tied up in it not able to generate returns elsewhere.
This is absolutely not the case with abrdn, I feel. While waiting for any growth or promotion back to the FTSE 100, it currently pays a dividend yield of 10%.
That means £10,000 invested in it now will make another £17,070 after 10 years. This is provided the yield averages 10% over the period and the dividend payments are reinvested back into the stock.
This ‘dividend compounding’ is the same process as happens in compound interest. But rather than the interest being reinvested, the dividend payments are.
This high yield, its growth prospects, and its undervaluation are the three key reasons I bought the stock recently.
