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Should I go for Standard Life Aberdeen’s 8% dividend yield, or is caution needed?

Shareholders have endured a rocky ride since Standard Life merged with Aberdeen Asset Management during 2017 to form Standard Life Aberdeen (LSE: SLA). Hard on the heels of that move, the enlarged firm sold off its insurance business to Phoenix Group in a deal that left SLA with a stake of around 20% in Phoenix.

The old Standard Life shareholders who once owned shares in an insurance company with an asset management division attached now essentially hold the stock of an asset management business similar to the old Aberdeen Asset Management but bigger. They’ve also seen the shares they’re holding plunge around 45% since 2015, and I reckon a big factor in that move has been the uncertainty of it all.

Difficult trading

But that’s not the whole story. The enlarged asset management business has been suffering from an outflow of business, with clients such as Lloyds Banking Group pulling billions from SLA’s funds. In last month’s full-year results report the firm described a “resilient” performance in 2018 “against a challenging industry backdrop and weak investor sentiment.” Profit from continuing operations came in flat, and net outflows continued from the firm’s funds “but were concentrated in a small number of strategies.”

With SLA’s dividend yield so high and its valuation so low, it’s clear that the stock market fears the worst. It’s possible that trading could deteriorate further, after all, asset management is a cyclical business and cyclical sectors cycle down as well as up. More than anything else, I reckon those making an investment in SLA today will be looking for a turnaround in the company’s fortunes.

There’s been a lot of change in the operational set-up, but here’s the record with regard to the dividend and operating cash flow per share:

Year to December

2013

2014

2015

2016

2017

2018

Dividend per share

22.1p

20.9p

21p

22.7p

24.3p

22.6p

Operating cash flow per share

(170p)

(74p)

(126p)

43p

106p

29p

Zero dividend progress

Over five years there’s been zero real progress with the dividend and operating cash flow has been patchy. That’s not the kind of financial performance I want from businesses that back up my dividend-led investments. Ideally, I’m looking for operating cash flow, earnings and the dividend to rise a little every year from an enterprise with strong defensive characteristics.

I don’t think I’ll ever get that from Standard Life Aberdeen. In a half-decent general economic downturn or an extended bear market for shares, I reckon the firm’s earnings, dividend and share price all have the potential to plunge further from where they are today.

With my dividend investments, I’m looking to introduce some stability into my portfolio but fear that SLA would end up swirling it around in the washing machine of cyclicality. I’ll leave the stock for those gunning for a turnaround and seek my dividends elsewhere.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.