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.
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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
