More often than not, when the dividend yield on a stock hits north of 10%, a cut the dividend follows. I am not so sure this will be the case for this FTSE 250 stock.
Leading asset manager
The aberdeen group (LSE: ABDN) share price has had a torrid few years. Rising outflows from the asset manager’s funds had seen its portfolio of assets shrink. However, in FY 2024, the business seems to have turned the tide. Assets under management and administration are up 3% to £511.4bn. Group outflows fell a whopping 96% to only £1.1bn.
Along with the news that it was bringing back the vowels to its name, brokers suddenly turned bullish and the price rose. Of course, its given up all those gains over the last few days. However, I don’t believe the underlying fundamentals of the business have changed at all. Indeed, tariffs could strengthen its business model.
Active investment
One of the key reasons for aberdeen’s poor performance over the past few years is the rise of passive investing strategies. Unless a portfolio manager was invested in the Magnificent 7, they had no chance of beating the market.
However, the woeful performance of the Nasdaq and mega-cap tech stocks so far this year is likely to accelerate a move back into active investment management.
It’s not just tariffs that are upending the global order. Globalisation has been going into reverse for some time as protectionism and nationalist agendas sweep across Europe and the US.
On top of that, mounting geopolitical risks and war in Europe have brought home to many governments the importance of supply chain resilience.
The list goes on and on. The point is this. The days when investors could just invest in an index and set-and-forget are over. What is needed now is astute investment strategies that are able to take into consideration all these macroeconomic factors. And aberdeen is an undoubted leader in this space.
Juicy dividend
I am a firm believer that the primary way to generate wealth over the long term is through picking businesses that pay sustainable, market-beating dividend yields.
With aberdeen’s headline-grabbing 11.6% yield on offer, an investor would double their money in less than eight years if dividends are reinvested. That is assuming no share price appreciation or dividend cut.
So, is this dividend safe? Adjusted capital generation of £307m means that cover is only 1.2 times, below my preferred cover of 2. The business intends to freeze the dividend at 14.6p per share until it is covered at least 1.5 times by adjusted capital generation.
It has set a conservative target of growing net capital generation by 26% by 2026. Now that it has swung back into profit, it bodes well on meeting such a target.
Asset businesses are directly exposed to the vagaries of markets. Heightened volatility means its funds could witness large drawdowns. Also, if tariffs do result in inflation, interest rates could remain elevated and people may decide to put their cash in savings accounts instead of the market.
However, as its share price sits at an all-time low, I have been buying. I think my future self will thank me.
