Investors who bought shares of Standard Life Aberdeen (LSE: SLA) expecting a stable share price and a regular income may feel disappointed.
These shares have fallen by about 25% since the merger between Standard Life and Aberdeen Asset management completed in August 2017. With the stock now yielding 7% — often a warning sign of problems ahead — shareholders may be wondering how much further the shares will fall.
Standard Life Aberdeen has come up on my own value investing screens recently. I haven’t hit the buy button yet, but I am getting close. Today I’ll explain why I think these shares could offer serious value.
Two overlooked events
Things have changed since last year’s merger. One big change is that the group’s insurance business has been sold to FTSE 250 firm Phoenix, in a deal valued at £3.24bn. The sale saw Standard receive a 19.99% shareholding in Phoenix and a cash payment of £2.34bn.
Management intends to return a total of £1.75bn of this cash to shareholders, via £750m of buybacks and a £1bn B share scheme (worth about 34p per share in cash). In addition, Standard Life Aberdeen is left with a shareholding in Phoenix that’s worth about £1bn.
A second change is that in August, India’s HDFC Asset Management Company floated on the Bombay Stock Exchange. Standard has a 30% shareholding in this business, which was worth about £1.3bn following the flotation.
Too cheap to ignore?
If we deduct the value of the Phoenix and HDFC investment holdings from Standard Life Aberdeen’s £9.4bn market cap, we get a valuation of around £7.1bn for the group’s remaining asset management business.
This part of the business is expected to generate adjusted net earnings of over £700m this year, putting the shares on a 2018 forecast P/E of about 10, with an expected dividend yield of 7%.
Although the group is still struggling with fund outflows, I believe the shares are probably too cheap at this level. I may buy a few for my own share portfolio.
A small-cap alternative yielding 6%+
If you feel that large companies like Standard Life Aberdeen are hard to understand and slow to turn around, then you might want to consider City of London Investment Group (LSE: CLIG) instead.
Like Aberdeen Asset Management, this £109m group has historically focused on emerging markets. Results out today show that funds under management rose by 10% to $5.1bn last year.
Revenue was 8% higher at £33.9m, while pre-tax profit was 10% higher, at £12.8m. Shareholders will receive a total dividend of 27p per share, an increase of 8% from last year.
This payout gives the stock a dividend yield of 6.7%, underlying the group’s core attraction for investors.
An under-the-radar star?
Today’s results include a handy summary of the company’s performance since its flotation in 2006. The shares have risen by 123% from an issue price of 180p to 403p today. But regular generous dividends mean the total return to shareholders since listing is now 377%.
This is a very impressive performance over 12 years, in my opinion.
For income investors who are worried that they might miss out on capital gains, this proven small-cap performer could be worth considering. I’d certainly be happy to add these shares to my own portfolio.
Roland Head 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.