Ashmore Group‘s (LSE:ASHM) a relatively unknown income stock that tends to keep a low profile. In 2024, it only made 20 stock exchange announcements. If the mandatory releases about shareholdings in the company — and changes in directors — are removed, the number falls to nine. It really does fly under the radar.
What does it do?
The company makes its money by charging fees for managing investments in over 70 emerging markets. Of the assets it looks after — mainly equities and fixed income securities — 96% come from what are described as “institutions”. These include central banks and pension funds.
Ashmore claims these markets have better growth potential than more developed ones. In 2025, these economies are expected to have a 2.6% higher growth rate. The company argues that the world’s estimated $100trn of assets are underweight in emerging markets. It claims the developing world offers better value than, for example, US tech stocks.
The company says it has a “distinctive” business model. There’s a “no star culture” with its 100+ investment professionals judged on performance rather than reputation. The company also claims its costs are well controlled, which means its operations are easily scalable. And it has a strong balance sheet with no debt.
For the year ended 30 June 2024 (FY24), the company generated revenue of £187.8m. Its earnings per share (EPS) was 13.6p. This means the stock at 7 February trades on a historically low multiple of 12.4.
And the company’s one of the most reliable dividend payers around. It’s maintained a payout of 16.9p for the past five fiscal years. Before that – from FY15 to FY19 – it paid 16.65p each year.
Based on dividends over the past 12 months, it’s the third highest-yielding stock in the FTSE 350. It presently offers a yield of 10.1%.
A worrying long-term trend
However, despite these positives, I’m not going to invest in the company. That’s because its assets under management (AuM) have been steadily declining in recent years. At the end of FY20, it was responsible for $83.6bn of investments. Four years later, this was $49.3bn. And the company’s latest results reveals a further fall – at 31 December – to $48.5bn.
Ashmore blames this on a sharp rise in inflation, a rapid tightening of monetary policy, global inflation and the pandemic. Whatever the reasons, a fall in its AuM’s going to put pressure on its income and, ultimately, could threaten its dividend.
Also, if I’m honest, the only reason this stock caught my attention is because of its generous yield. Turn the clock back five years, its dividend was the same as it is today. Yet it was yielding a more modest 3%.
The reason for the impressive yield’s due to a fall in the company’s share price rather than a rise in its payout.
The reduction in client funds is clearly a concern for investors. And having a dividend higher than its EPS isn’t sustainable. In recent years, it’s been able to maintain its payout by selling some of its own relatively modest investment portfolio.
For these reasons, I don’t want to include Ashmore Group’s stock in my portfolio. However, my review of the company is a useful reminder that apparently generous dividend yields should be treated with caution.
