The FTSE 250 can be a treasure trove for investors looking for income potential. However, not every stock with a high dividend yield is worth buying. So when I spotted a share with a double-digit percentage yield but a falling share price, I knew I had to do some more digging. Here’s what I found out.
Falling revenue, rising yield
I’m referring to Ashmore Group (LSE:ASHM). The specialist investment management firm currently has a dividend yield of 11%, making it one of the highest-yielding options in the entire index.
Before I can figure out if the stock is a bargain, I need to understand why it has dropped by 30% over the past year. Part of the problem has been declining assets under management (AuM). For financial service providers, this metric is really important. It refers to how much in client funds it manages at any point in time. As it makes money from charging fees and commissions from managing the money, it’s directly correlated to overall profitability.
For Ashmore, the latest half-year results out in February showed AuM falling from £39.44bn from June 2024 to £39.04bn now. This factor pulled revenue down from £94.5m to £81m.
Another factor has been the disappointing investment performance over the past year. Only 43% of invested client funds have outperformed the benchmark in the last year. It’s not a great advert for the business when trying to attract new money.
Attractively priced
The main reason why I’m tempted to buy is that the share price recently hit the lowest level in a decade. Based on the current figures, the price-to-earnings ratio is 11. This ratio is close to what I would call a fair value. So although the stock could keep falling, it’s now in a position where it would fall into undervalued territory. Therefore, I feel that any further losses should be relatively small, as value buyers would likely step in and snap up some Ashmore shares.
Further, the management team decided to hold the dividend per share at 4.8p following the recent results. If they were genuinely worried about the outlook for the business, they would have cut the dividend to help cash flow. This provides me with some hope that things aren’t as bad as the share price move suggests.
A high-risk play
Even though I mulled it over for a while, I’ll hold off purchasing the stock right now. The dividend cover is 0.57, which is below the figure of 1 that I use to consider it sustainable. I feel I need to see some good news out first before taking the plunge. Investors who have a higher risk tolerance than me might be happy to get involved right now. But I just want to see some signs of the stock stabilising first before committing.
