High-yield shares could become increasingly popular during the course of 2017. Inflation is expected to rise to as much as 3% this year, which could cause investors to seek ever higher yields in order to protect against the destructive force of a rapidly rising price level. Reporting today is a company that currently yields 6.8%, which is over 3% higher than the FTSE 100’s yield. Could now be the right time to buy it for the long term?
The company in question is Aberdeen Asset Management (LSE: ADN). Its trading update for the quarter to 31 December was rather mixed. Assets under management declined from £312bn to £303bn due to net outflows of £10.5bn.
This figure included two large redemptions of active equity mandates from a UK wealth manager and a Sovereign Wealth Fund that the company reported in its 2016 results. There were also anticipated structural outflows from certain institutional clients, while a further £2.4bn is scheduled to be withdrawn from lower-margin portfolios during the current quarter.
However, the investment performance of the company was relatively impressive. Net outflows were partially offset by £3.3bn asset appreciation, while there has been a growing interest in the company’s wider range of capabilities. That’s despite investors generally putting asset allocation decisions on hold following the US election.
As mentioned, Aberdeen currently yields 6.8%. While exceptionally high, dividend growth could be somewhat lacking over the next couple of years. That’s partly because dividend cover is relatively modest at 1.2, while the company’s bottom line is forecast to fall by 1% this year before rising by 5% next year.
Despite this, it has significantly greater dividend appeal than sector peer Hargreaves Lansdown (LSE: HL). It currently yields a rather lowly 2.7% from a dividend which is covered just 1.1 times by profit. Although earnings growth of 10% is expected this year, followed by a rise of 14% next year, it seems unlikely that the majority of this growth will be passed on to shareholders in the form of a dividend. Therefore, Aberdeen’s income prospects appear to be much brighter.
The same could be said when it comes to valuation. Aberdeen currently trades on a price-to-earnings (P/E) ratio of only 11.9, which indicates an upward re-rating is on the cards. However, Hargreaves Lansdown has a P/E ratio of 32.9. Certainly, the latter’s forecasts are superior to the former’s outlook, but even factoring this in makes it difficult to justify such a large difference in the two companies’ ratings.
Aberdeen offers one of the highest yields in the FTSE 350. Therefore, it’s likely to become increasingly popular among investors as inflation rises during the course of the year. Furthermore, it has a relatively low valuation which provides it with a margin of safety should market conditions turn against it. So it appears to have a good chance of delivering a total return which is ahead of the FTSE 100.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management and Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.