A 10% yield but down 70%! Time to buy this FTSE gem?

This emerging markets investment group’s offering one of the highest dividend yields in the FTSE 350 and is maintaining shareholder payouts.

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Dividend yields have surged since inflation triggered a stock market correction. The UK’s leading indices, like the FTSE 100 and FTSE 250, have started bouncing back. But there are still plenty of companies trading at depressed valuations, causing some yields to stay high.

One example of this would be Ashmore Group (LSE:ASHM). Despite economic conditions steadily improving worldwide, the emerging markets asset manager’s still seeing its stock price heading in a downward trajectory. In fact, shares have tumbled 18% over the last 12 months and zooming out to the last five years reveals a massive 70% collapse in market capitalisation.

What’s going on? And is this secretly a buying opportunity for long-term investors?

Zooming in on debt

While most companies take on debt to fund operations, Ashmore likes to buy debt to generate an income stream. The investment enterprise primarily specialises in sovereign and corporate debt. Of the $51.9bn (£40.9bn) of assets under management, only $6.8bn of this is in the form of stocks.

At first glance, the recent hikes in interest rates would seem like a boon. After all, higher rates mean higher interest payments to Ashmore. And looking at its latest results, the business has reaped some benefits from this change in monetary policy. For example, net interest income over the last six months of 2023 almost doubled, from £6.5m to £12.8m.

Subsequently, pre-tax profits were up 38%, surging to £74.5m, far outpacing analyst expectations. Yet, digging a little deeper reveals things aren’t as positive as they seem since most of this profit came from one-time gains.

Higher interest rates have wreaked havoc on the debt market as older low-yielding bonds have seen their valuations tumble. Meanwhile, China’s underperforming economy’s acting as another drag on emerging market bond and equity securities. That’s why, when ignoring the group’s one-time gains, underlying earnings are actually down by more than a third.

An opportunity in disguise?

Given the weakened state of its investment portfolio, Ashmore’s tumbling stock price makes a lot of sense. But investors are now faced with the prospect of a potentially lucrative passive income stream. Despite all the market volatility over the last five years, dividends have continued to flow into shareholder’s pockets. And now that the yield stands in double-digit territory, this could be a chance to earn massive passive income.

The firm’s bond portfolio has taken a beating in terms of price. But as these bonds eventually approach maturity, prices will naturally recover, providing the underlying borrower doesn’t fail. In the meantime, interest payments have continued to flow into the group’s cash flow, making Ashmore a highly cash-generative enterprise.

With that in mind, it’s not too surprising to see management maintain its dividend per share at 4.8p. Even more so, given that emerging market securities have started showing early signs of recovery.

All things considered, Ashmore isn’t a firm I’m tempted to start investing in right now. The dividends are undeniably attractive, but its operations are dependent almost entirely on macroeconomic forces beyond its control.

Personally, that’s not something I’m interested in owning. Yet, for other income investors, a closer look may be warranted.

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.

Zaven Boyrazian 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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