A 9.5% yield but down 35%! This overlooked FTSE dividend superstar looks a bargain to me!

After demotion from the FTSE 100, this share fell off the radar for many investors. But it has a very high dividend and looks undervalued to me.

| More on:
Person holding magnifying glass over important document, reading the small print

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.

FTSE investment manager abrdn (LSE: ABDN) has seen its share price drop 35% from its 20 July 12-month traded high.

This was almost entirely due to a technical readjustment after it was demoted from the FTSE 100 to the FTSE 250 last August.

It meant that the share was automatically dropped from funds tracking the FTSE 100. Other funds that only invest in the most regulated, highest-credit-rated shares also cut their holdings in it.

I almost never invest in non-FTSE 100 firms, but three key factors prompted me to do so in abrdn recently.

It was here before and bounced back

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.

I think the same may happen again as the company has embarked on a major reorganisation to that end.

It intends to cut costs by £150m, focusing on removing layers of management – always a good idea in my view. The firm also sold its lacklustre US and European Private Equity operations.

It is now concentrating on its well-performing investments, advisory, and the ii investment platform. These made adjusted operating profits of £50m, £118m, and £114m, respectively, in 2023.

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

One risk is that its reorganisation is not successful long term. Another is that its assets under management (AUM) may start to decline again.

However, a Q1 2024 update showed its AUM rose by 3% year on year, to £507.7bn. And consensus analysts’ expectations are now that its earnings will grow by a stunning 56% every year to end-2026.

Is it undervalued?

The demotion and automatic sell-off that followed have left the shares very undervalued, I think.

On the key price-to-book (P/B) measurement of stock value, it trades at just 0.5 against a peer group average of 3.6.

It also looks undervalued on the price-to-sales (P/S) ratio – trading at only 1.9 against a peer group average of 3.2.

On both key measures, the shares look like a major bargain to me.

Huge dividend payer

In 2023, it paid a total dividend of 14.6p per share. Based on the current share price of £1.53, this gives a yield of 9.5%.

Yields can fall as well as rise, depending on dividend payments and share prices. However, this compares to the current average FTSE 250 yield of 3.4% and the FTSE 100’s 3.8%.

So, a £10,000 investment would yield £950 this year. Over 10 years, provided the rate stayed the same, this would add £9,500 to the initial investment.  

Crucially, though, much more could be made if I reinvested the dividends back into the stock – known as ‘dividend compounding’.

Doing this would give me an extra £15,761 instead of £9,500.

After 30 years of doing this with an average 9.5% yield, I would have £170,949. This would pay me £15,434 ayear in dividends or £1,286 a month.

Given the excellent yield, the apparent undervaluation, and its strong growth prospects, I will be buying more abrdn shares very 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.

Simon Watkins has positions in Abrdn Plc. 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.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in…

Read more »

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »