The FTSE 250 share I’m looking at today could be exactly the kind of stock I want to buy. Cheap, with lots of cash, and a very high dividend yield.
Of course, it’s not quite that simple. The company in question is asset manager Ashmore Group (LSE: ASHM). This £1.2bn firm specialises in emerging markets and is led by founder Mark Coombs, who is also a 29% shareholder.
Unfortunately, Ashmore’s share price has tumbled 70% from the record highs seen in February 2020. I reckon that needs some explanation.
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What’s going on with Ashmore shares?
Emerging markets can be difficult for investors to access directly. There’s also a steep learning curve. For these reasons, I think Ashmore’s specialist strategy is attractive as a business model.
The problem is that investors have been pulling money out of emerging markets funds over the last few years. Presumably they have been investing the cash elsewhere, perhaps in US tech stocks, which have outperformed most other markets.
Ashmore’s total assets under management have fallen from $94.4bn in June 2021, to just $49.5bn at the end of June 2024.
Asset managers’ fees are usually calculated as a percentage of assets under management. When assets are down, fee income (and profits) fall sharply.
That’s what has happened here. Ashmore’s operating profit has fallen from £267m in 2021 to less than £80m last year.
Is Ashmore at a turning point?
It’s been a difficult period for Ashmore. But in my experience, shifts like this rarely last forever.
At some point, I would imagine that investors will start to shift some capital back into emerging markets.
One positive sign for me is that the performance of Ashmore’s strategies seems to be improving.
The company’s funds delivered positive investment gains in 2022/23 and during the six months to December 2023.
If Ashmore can extend this positive performance to the year ended 30 June 2024, I wonder if investors might start to get interested again – especially with a market correction seemingly underway in US markets.
Cash-backed dividend looks safe to me!
Coombs was prudent during the good years and built up a huge cash buffer at Ashmore. The most recent balance sheet (31 Dec 23) showed £590m of surplus capital, including £452m of cash.
The company’s surplus capital is worth about half the current £1.2bn market cap.
Broker forecasts price the stock on about 15 times earnings. But stripping out surplus assets reduces this price-to-earnings multiple to around 7.5. That looks cheap to me.
Although the 10% dividend yield isn’t fully covered by earnings at the moment, I reckon the group’s cash reserves mean the payout will remain safe.
After all, I estimate that founder Coombs receives a £35m dividend each year through his 29% shareholding.
I think the main risk here is that it’s impossible to know when (or if) Ashmore will start to attract significant new client cash again. Until that happens, earnings will probably remain weak and could fall further.
For this reason, Ashmore shares are not without risk. But on balance, this stock looks seriously cheap to me. If I was looking to buy an asset manager today, it’s a business I’d consider.
