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Why 6% yielder Standard Life Aberdeen plc isn’t the only dividend stock I’d consider today

Shares of small-cap financial services firm STM Group (LSE: STM) rose by more than 6% on Tuesday after the company issued its final results for 2017.

The company, which specialises in providing pension and wealth management services for Britons living abroad, said that revenue rose by 24% to £21.5m last year. Underlying pre-tax profit rose by 39% to £3.2m, while underlying earnings rose by 68% to 5.29p per share.

Cash and cash equivalents held on the group’s balance sheet rose by 55% to £18.4m, while the final dividend will rise by 20% to 1.2p per share. This gives a total payout for the year of 1.8p per share.

An eventful year

2017 was a difficult year for the firm. Tax changes in the government’s Spring Budget meant that the firm’s overseas pension business took a big hit, losing an estimated 80% of new sales of its ‘QROPS’ product.

To accommodate these changes, the company launched a new international pension product, the International SIPP. In today’s results, STM said that sales of this new offering have replaced most of the lost QROPS business by “both policy number and revenue”.

The firm is also continuing to expand its life assurance business, where revenue rose from £2.8m to £5.8m in 2017.

In my opinion, this company seems to be adapting well to changing market conditions. STM’s strong cash balance also gives the firm some breathing room and could provide funding for further acquisitions.

STM shares now trade on around 9.5 times 2018 forecast earnings, with a forecast yield of 3.5%. I believe this could be of interest to long-term investors.

Don’t give up too quickly

When Standard Life and Aberdeen Asset Management announced plans to merge and form Standard Life Aberdeen (LSE: SLA), hopes were high that the group would deliver bigger profits at a lower cost. So far the evidence has been mixed.

The group’s shares have fallen by about 15% since the merger completed last summer. Although assets under management and administration ended 2017 up by 1%, at £654.9bn, we learned recently that Lloyds Banking Group will withdraw approximately £109bn of assets under management from the group, subject to a 12-month notice period.

According to the firm, the Lloyds assets represented “less than 5%” of the combined firm’s 2017 revenue. Cost-cutting should reduce the impact on profits, but analysts’ consensus forecasts for 2019 have still been cut by 8% since this news was released.

Despite this, many large deals have teething problems. I think it’s too soon to write off this FTSE 100 firm. Indeed, my view is that it’s starting to look like a possible contrarian buy.

Is this 6% yield safe?

Standard Life Aberdeen’s falling share price has left the stock with a 2018 forecast P/E rating of 12, and a potential yield of 6.4%.

Although dividend cover is now quite slim, at just 1.3 times earnings, I think this valuation is starting to look quite tempting.

Analysts forecasting a 1% increase in earnings per share for 2018, with a 6% increase in 2019. Investors expecting fireworks should probably look elsewhere, but I think the group’s strong cash generation means that a dividend cut is unlikely.

Indeed, I believe the shares are starting to shape up as a potential long-term buy for income investors. I’d consider opening a starter position at current levels.

Buy-And-Hold Investing

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Standard Life Aberdeen. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.