It’s fair to say that the merger between Standard Life and Aberdeen in 2017 to form FTSE 100 giant Standard Life Aberdeen (LSE: SLA) has fallen short of expectations.
Hopes of creating an all-conquering fund management behemoth suffered a setback when Lloyds Banking Group and Scottish Widows ended its £109bn asset management contract, claiming the new combined entity was a competitor to its investment division. This was a blow, even though it represented less than 5% of the group’s 2017 revenues.
Lloyds planned to shift £80bn to Schroders and £30bn to BlackRock, but on Tuesday a tribunal ruled against Lloyds, which may now have to hand over cash for breaking its deal early, or even leave funds with Standard Life until 2022. This may be low-margin business but the news rounds off a good few weeks for the group, which is up almost 13% over the last month. Its stock is still down a third over the past year, though.
The biggest single attraction of Standard Life Aberdeen jumps out at you. This is a top blue-chip with a market cap of £6.56bn that is currently trading on an eye-popping forward yield of 8.2% (it was 9.2% until the recent share price recovery). If you put your money into an easy access cash ISA instead, the best you can do is 1.46% from the Yorkshire Building Society, less than a fifth of the return.
However, while top dividend stocks pay far higher rates than cash ever will, that income is not guaranteed. The Standard Life Aberdeen yield is covered just 1.1 times by earnings, and is such a generous payout at 8% plus that you have to question whether it is sustainable in the longer run.
Last year, it sold its life assurance business to Phoenix Group, as it focuses on becoming a pureplay asset manager. Unfortunately, this has cut off a reliable stream of cash, as income from insurance is less volatile than from fund management, which rises and falls in line with market conditions and investor sentiment.
Flagship fund Standard Life Global Absolute Return Strategies, or GARS, has had a tough time, and assets under management have dropped from around £24bn to just £10bn. Net outflows across the group totalled 7% in 2018.
Last year was a tough one for markets generally but the group’s profit from continuing operations remained broadly flat at £650m, as it posted a “resilient performance against a challenging industry backdrop and weak investor sentiment”. 2019 has seen markets get off on a more positive foot, and that’s another reason why Standard Life Aberdeen is up.
Analysts are forecasting a dividend per share of 21.8p this year, against forecast earnings per share (EPS) of just 20.96p. This reduces cover to just 0.96. However, earnings are forecast to rise 18% this year and another 13% in 2020, which will increase EPS to 23.65p with a dividend of 22.37p, lifting cover to 1.06. It’s still wafer thin, but management seems committed to its payouts for now.
Trading at a forecast 12.9 times earnings, there is scope for further share price recovery. Even if the dividend is cut, it should still pay far more than a cash ISA. Here are two more top FTSE 100 income stocks to consider that are paying more than 7%.
Harvey Jones 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.