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Is Standard Life Aberdeen plc a high yield dividend star or a dangerous dog of the FTSE 100?

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You can get decent investing results by collecting dividends from high-yielding stocks and reinvesting them to compound your gains. However, that strategy only works well as long as the stocks you buy and hold have sustainable dividends.

Is financial firm Standard Life Aberdeen’s (LSE: SLA) 6%-plus dividend yield sustainable? This table summarises the recent financial record:

Year

2013

2014

2015

2016

2017

Net cash from operations (£m)

(2,899)

(1,261)

(2,264)

736

2,194

Profit before tax (£m)

423

422

415

789

964

Adjusted earnings per share

14.2p

15.8p

13.5p

29.4p

30.1p

Dividend per share

15.8p

17.03p

18.36p

19.82p

21.3p

The dividend rose almost 35% over the last four years. Net cash from operations swung from big negative figures to a positive number in 2017 that comfortably covered profits and drove up earnings. I think the erratic cash flows speak volumes about the cyclicality of the insurance sector.

Big changes on the way

Maybe such volatility in the cash flow account is one reason that Standard Life Aberdeen is getting out of operating in the insurance business. The firm plans to sell its UK and European insurance business to Phoenix Group in a move that will propel the company towards becoming what chairman Sir Gerry Grimstone describes as “a capital-light investment company.”

The firm plans to return to shareholders around £1.75bn of the £2.3bn or so cash that will be generated from the sale and to invest the rest into the ongoing investment business. The deal will also leave Standard Life Aberdeen holding around 20% of Phoenix Group’s shares, thus extending an existing long-term partnership between the two firms. Standard Life Aberdeen will retain its UK retail platforms and financial advice business, and the two firms aim to work together with Standard Life Aberdeen being Phoenix Group’s asset management partner for the business acquired by Phoenix.

Such major change in the operational set-up comes hard on the heels of Standard Life’s 2017 merger with Aberdeen Asset Management, so if you are a shareholder, I don’t blame you if you feel a little unsettled at the moment. I reckon the state of flux is one reason for the stock looking a little out of favour with investors right now.

Standard Life Aberdeen’s dividend sustainability score

Let’s look at three different features to judge whether the company’s dividend seems sustainable with each indicator scored out of a possible five points:

  1. Dividend cover: adjusted earnings covered last year’s dividend just over 1.4 times. 2/5
  2. Cash flow: operating cash flow easily covered profits in 2017 but has been volatile. 3/5
  3. Outlook and trading: recent trading has been good and the outlook is optimistic 5/5

Overall, I score Standard Life Aberdeen 10 out of 15, which makes me a little cautious about the sustainability of the firm’s dividend, particularly with the imminent big changes to its business model. Just like the insurance sector, asset management is known for its cyclicality, which could lead to volatile share price movements and variable dividend payments in the future. So I remain wary about using Standard Life Aberdeen as a vehicle for long-term income generation from the dividend.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.