Should I Buy Schroders plc?

Last time I checked out fund manager Schroders (LSE: SDR), back in April, I underrated its prospects. I was disappointed by its underpowered 2% yield, and deterred by its pricey evaluation, at around 20 times earnings. I decided there were better ways for bullish investors to pay stock markets, but history has proved me wrong. The stock is up 22% since then, against meagre growth of less than 4% on the FTSE 100 as a whole. Would I buy it today?

Putting the ‘fun’ into fund manager

I still found plenty to like about Schroders last April. It had grown at 10 times the rate of the FTSE 100 over the previous five years, returning 105% against 10%. It boasted a healthy balance sheet, had just hit a record high of £212 billion under management, and enjoyed a good global spread of revenues. It has also been on the acquisition trail, successfully incorporating Cazenove, with its well-matching mix of funds, in a £385 million deal.

But it also had its share of troubles, with customers abandoning its private banking business, and performance fee income falling. With hindsight, however, the good clearly outweighed the bad. Schroders was also helped by a surprisingly strong year for stock markets, with double-digit returns in 2013.

Schroders is developing nicely

Fund managers are a geared play on stock markets, and I’m writing this as the market indulges in panicky sell-off, largely on fears over China. This may work in favour of Schroders, which has much greater focus on developed markets than, say, emerging market specialist Aberdeen Asset Management.

Stock markets could be in for a stickier year, thanks to China-related fears, QE tapering and continuing eurozone uncertainty, but brokers remain optimistic about Schroders. Barclays Capital and JP Morgan are both overweight, with targets of 3010p and 2802p respectively, against today’s 2477p. The dividend still disappoints, but management policy is progressive, and investors were rewarded with a 23% hike in the summer.

I’m still banging my head against the same problem, which is that Schroders is expensive. In fact, it’s a lot more expensive than it was, trading at 24 times earnings. And the yield is lower, at 1.7%. But a PEG of 1 isn’t too demanding. Better still, earnings per share are forecast to grow a beefy 16% this year and 11% next year. That should lower the price/earnings ratio to just 14.3 by December 2015, and hike the yield to 2.6%. Schroders is getting rapidly cheaper, having dropped 4% in early trading on Monday. If you’re feeling bullish, this could be a good opportunity to buy it.

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Harvey Jones doesn't own any stock mentioned in this article.