Income investors have had a tough time of it lately with banks’ dividends a mere shadow of their pre-Crisis levels, mining giants slashing shareholder returns left right and centre and oil majors’ dividend cover slipping towards non-existent. In this environment of lower and lower yields, is Aberdeen Asset Management’s (LSE: ADN) 6% dividend a panacea for your portfolio or a siren luring you onto the rocks?
First, the good news. Dividends remained covered by earnings last year and management has made little noise of a possible cut. And with many major emerging markets enjoying a bullish summer there’s hope on the horizon that institutional and retail investors alike will start pouring back into Aberdeen’s emerging market-focused funds.
However, this may not be enough to make Aberdeen a great long-term play for income hungry investors. The problem is that investing trends can be incredibly cyclical. After years of talking up the world-beating potential of BRICs and other developing markets, investors began to figure out that when Chinese demand for commodities eventually slowed, the emperor would be discovered without clothes.
That’s why Aberdeen has suffered 13 straight quarters of net fund outflows. In the past quarter alone more than £8.9bn was pulled from Aberdeen’s funds. For a fund manager, fewer assets under management means lower fee revenue, and we see this with a 20% drop in year-on-year revenue and 50% fall in operating profits from interim results through March.
So, the question becomes whether Aberdeen is close to rebuilding confidence and coaxing institutional investors back into their funds. It’s not impossible, but with oil-producing nations’ sovereign wealth funds being tapped to ameliorate budget deficits and commodity-reliant developing markets looking like poor investment, I’d put my money on Aberdeen’s woes continuing for some time.
Debt load
Dividend cover is also becoming a problem for oil services company Petrofac (LSE: PFC). Like the rest of the industry, it has felt the sting of lower prices passed on by struggling producers. This problem was compounded by a disastrously over-budget offshore turnkey project that ended up losing the company well over $400m last year alone.
The upside is that management learned their lesson from this damaging foray into offshore construction and is now doubling down on its core market of onshore services for Middle Eastern national oil companies. As these countries race to pump higher volumes of oil to make up for decreased prices, Petrofac’s order book has ballooned to $17.4bn.
This gives the company several years of visible revenue and offers significant downside protection. Petrofac is also forecast to return to profitability this year and analysts are expecting earnings to cover dividends 1.4 times over.
While current dividends should remain level in the coming years I wouldn’t expect any huge increase in shareholder returns over the same period. The main culprit isn’t low oil prices, but rather Petrofac’s $877m of net debt, which is a full 2.8 times last year’s EBITDA.
But, if Petrofac’s customers continue to pump oil at prodigious rates the company should be able to afford both 6%-plus yielding dividends and whittling down its pile of borrowing.
