FTSE 250 global investment manager abrdn (LSE: ABDN) has dropped 36% from its 20 July 12-month traded high. This was largely due to assumptions that it would be demoted from the FTSE 100 last August.
It was – and this meant that FTSE 100 tracker funds automatically sold their holdings in it. Funds that are allowed only to invest in the highest-credit-rated shares of the leading index did the same.
However, it was precisely this technical readjustment of abrdn’s valuation that roused my interest in it.
We’ve been here before
To me, such a demotion is rather like the relegation of a Premier League team to the Championship. I cannot help but think there is every chance it will be promoted again, as it still has top-tier quality to it.
I thought the same of abrdn, particularly when I discovered that this was precisely what happened the previous year. It was demoted from the FTSE 100 at the end of August 2022 and then promoted back that December.
Over the period, its share price followed the same pattern as this time round. It crashed on demotion rumours, traded evenly at the lower price for a while, and then soared on promotion again.
As it stands, abrdn still looks undervalued against its competitors. On the key price-to-book (P/B) measurement of stock value, it trades at just 0.5 against a peer group average of 3.8.
It also looks undervalued on the price-to-sales (P/S) ratio – trading at only 1.8 against a peer group average of 3.4.
Is there fundamental quality here?
The key driver behind its 2023 demotion was £4.4bn of outflows of assets under management (AUM) in H1. Over the same period, it made a pre-tax loss of £169m.
However, following its demotion, it embarked on a major reorganisation aimed at cutting costs by £150m and streamlining operations.
To these ends, it sold its lacklustre US and European Private Equity operations. It is now focused on its more-strongly-performing investments, advisory, and the ii investment platform. These made adjusted operating profits of £50m, £118m, and £114m, respectively, in 2023.
So, with its reorganisation only half complete (it ends next year), a Q1 2024 update showed its AUM rose 3% year on year, to £507.7bn. 2023 as a whole also saw it making an adjusted operating profit of £249m.
One risk is that its reorganisation falters. Another is that its AUM starts to decline again.
However, consensus analysts’ expectations are now that its earnings will grow by a stunning 56% a year to end-2026.
High dividend payouts
In 2023, it paid a total dividend of 14.6p per share. Based on the current share price of £1.51, this gives a yield of 9.7%. This compares to the current average FTSE 250 yield of 3.4% and the FTSE 100’s 3.8%.
So, £10,000 invested at an average 9.7% yield would produce a total investment pot of £181,433 after 30 years. This is provided I reinvested the dividends back into the stock – known as ‘dividend compounding’.
This would pay me £16,708 a year in returns, or £1,392 every month.
Given the excellent yield, the apparent undervaluation, and its strong growth forecast, I will be buying more abrdn shares very soon.
