Liontrust Asset Management (LSE: LIO) offers a huge forecast dividend yield of 19%.
If it comes good, £10,000 invested today could turn into £11,900 in a year. If it continues at that rate for the next 10 years we could end up with £56,900, with dividends reinvested. That’s the kind of magic that compound returns can weave.
Common sense and the ‘no free lunch’ idea will suggest that’s an unlikely scenario. Never mind the fact that dividends are never guaranteed, we already see this one is set to fall. Analyst forecasts show it dropping by 2027 — but only to 14%. And that’s still, well… wow! We need to dig deeper.
Big picture
The share price chart above already paints a gloomier picture, with the Liontrust share price down a whopping 86% since a peak in 2021. That’s boosted today’s dividend yield. But anyone who bought at the peak should be expecting only 2.8% this year on what they paid in 2021.
Even then, the expected cash wouldn’t be close to being covered by forecast earnings. So has what initially might have looked like a no-brainer buy turned into one to keep at barge-pole distance?
The company seems to think its shares are too cheap. In March, it completed a share buyback valued at £5m. So it’s been returning even more cash on top of those big dividends. And it’s coming from… hmm, I’m not quite sure where.
Fickle investors
One problem is that the past few years of high interest rates have turned a lot of investors away from the stock market. Cash savings can be more attractive, and just look at where gold and Bitcoin have gone.
At times like this, I’d expect smaller investment firms to suffer more outflows than the bigger players. Liontrust has a market cap of only £235m. Assets under management stood at £22.6bn at 31 March, and have been falling.
Compare that with a company like M&G in the FTSE 100. The market cap there is up at £6.1bn. And it had £346bn in assets under management at the last count.
What next?
In April’s trading update, Liontrust CEO John Ions said “It feels that over the past few years, the only certainty has been uncertainty“. I know what he means.
He told us: “The enhancements we have made to the business, our strong investment capability, brand and client service, and the robust operating model give us confidence we can emerge stronger from the current turbulent environment and help our clients to do so as well.“
I do see stock market investing returning to strength as the economy improves and interest rates fall further. It’s what UK stocks and shares have done for way more than a century now. In the long term, they’ve just kept going up and have easily beaten cash-based investments.
Optimism vs uncertainty
If the CEO’s optimism is well placed, we could be looking at a buying opportunity now. But until I can really understand where future dividend cash will from, I’ll keep away. Full-year results are due on 25 June.
