After plunging 55%, does this stock’s eye-watering 10% yield offer a lucrative second income?

Mark Hartley is enticed by the potential second income offered by this FTSE 250 dividend stock. But is the falling share price an opportunity or should he be concerned?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smart young brown businesswoman working from home on a laptop

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.

The recent stock market slump offers investors an excellent opportunity to build a second income from UK shares. There’s a wealth of quality stocks with super-high yields selling at cheap prices. 

Investment manager abrdn (LSE: ABDN) looks to me like it could fit the bill — but is there a future in it?

A difficult decade

The share price is down 55% in the past five years and 75% since an all-time high of £5.71 in May 2015. During that period, several notable developments have taken place.

Created with Highcharts 11.4.3aberdeen group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

In 2017, Aberdeen Asset Management merged with the 200-year-old insurance firm Standard Life. A year later it sold the Standard Life business to refocus purely on asset management. 

Then, in July 2021, it controversially rebranded to abrdn.

Later that same year it acquired online trading platform interactive investor, further cementing its intentions to modernise. But the benefits of these developments are yet to materialise.

Despite all efforts, earnings continued to decline. To save money, it sold some of the business and in January, job losses ensued. 

Soon after, the CEO stepped down.

The modern name may have been a bit ahead of its time and out of place in the conventional financial world. However, as investing becomes more in vogue among younger generations, it could eventually be a boon for the company.

As of June 2024, abrdn held just over £500bn in assets under management (AUM), up 0.9% after a 1% decline in 2023.

Will the share price cover?

It’s often attractive to acquire shares while prices are cheap. It’s like a Black Friday special for the stock market. The problem is, unlike the latest TV or dishwasher, a stock is an investment. So I need the price to stop falling at some point.

The bonus is that a falling price naturally results in a rising dividend yield. So I get the promise of higher returns on an already cheap investment. The only return I get from a cheap TV is football scores and depressing news.

However, if the price continues to decline, then the dividend gains are all for nothing. And in the worst-case scenario, the company might cut dividends to reduce expenses. 

So I can’t just buy any old cheap share — I need to make sure there’s some chance of a turnaround in the near future.

For that, I need to value the share.

Valuation

abrdn’s trailing price-to-earnings (P/E) ratio is 7.9, which would usually suggest good value. However, with earnings forecast to decline, its forward P/E ratio is 14.6, which is less impressive. It’s not terrible, it’s just not great. 

Revenue is also forecast to decline and return on equity is estimated to fall below 5% in three years. 

On the plus side, the company has a clean balance sheet, with little debt (£600m) and a LOT of cash (£1.4bn). This tells me that if nothing else, dividends are likely to continue uninterrupted. 

Still, I feel there remain too many concerns around the company’s operations. I like the high yield and would love to benefit from those returns but right now, it’s too risky.

If management stabilises and the AUM continues to rise, I may consider the stock in the future

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.

Mark Hartley 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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »