Investors in Standard Life Aberdeen (LSE: SLA) have had a torrid time of it over the past 12 months.
Including dividends, since mid-March 2018, the stock has lost 34.6%, underperforming the FTSE 100 by 38.8%. Over the past five years, the company’s performance isn’t much better.
Investors who bought the Standard Life share price in March 2014 have seen the value of their investment lag the FTSE 100 by 8.5% per annum including dividends.
Based on these numbers, I calculate that every £1,000 invested in the FTSE 100 five years ago is worth 50% more today than a similar investment in Standard Life.
After these declines, the company’s dividend yield has spiked to 9.2%, giving it the third highest dividend yield in the FTSE 100. The question is whether it is worth making the most of this opportunity and pouncing on Standard Life today, or should you stay away?
Buy, sell or hold
Looking at the Standard Life share price, I can see why it has fallen so much over the past few years.
The group’s earnings per share have remained virtually constant since 2014. Back then, the stock was trading at around 400p, giving it a valuation of approximately 18 times earnings. In the years since, the shares have traded as high as 490p (a P/E of 22.3) and as low as 235p (a P/E of 10.4).
Without looking at the stock’s chart, I would say that it deserves to trade at the lower end of this range. If we look at the rest of the UK asset management and financial services sector, it is clear that most of Standard Life’s competitors trade at a P/E between 14 and 10.
Considering the fact that the company is facing substantial outflows from its asset management business (outflows hit £40.9bn last year), and City analysts are not expecting any sort of earnings growth for the next two years, I would say that bolsters my view that the shares should trade at the lower end of this range.
So, based on the company’s fundamentals, I think the Standard Life share price is appropriately valued and is unlikely to fall much further from current levels.
But what about the 9.2% dividend yield?
A good income investment?
Usually, when a dividend reaches this level, it is a sign that investors do not believe that the payout is sustainable. From an earnings perspective, I agree. Analysts expect the company to pay 23p per share in dividends for 2019, but are only expecting earnings per share of 21.9p.
Still, management has come out to say that the payout is here to stay for the foreseeable future as the company continues with its plan of becoming a pureplay asset manager. So far, this strategy has not yielded tremendous results, but the firm is still in the process of integrating itself with Aberdeen Asset Management, which it acquired two years ago.
A lot hinges on the company’s ability to stem outflows from its asset management business. If it can do this, then the business’s outlook will dramatically improve. Until we see the asset management side of the enterprise improving, I do not think it is wise to buy the shares today.
That 9.2% dividend yield might look attractive, but if management decides to cut it by 50%, the capital losses could be significant, and that’s why I’m staying away.
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Rupert Hargreaves owns Standard Life Aberdeen. 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.