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Is the Standard Life share price a bargain or should I buy this dividend-growing mid-cap?

It’s easy to stick with the big names when you’re investing in the stock market. And in many cases that’s what I’d do. Large, proven firms tend to survive through thick and thin.

However, surviving isn’t always the same as succeeding. Since Standard Life and Aberdeen Asset Management merged to form Standard Life Aberdeen (LSE: SLA) in August 2017, the group’s share price has fallen by more than 35%.

Although shareholders have enjoyed some generous dividends, this hasn’t been enough to offset the decline in their shares. ‘Staberdeen’ has significantly underperformed sector rivals such as Aviva, Prudential and Legal & General.

Assets managed by the group have fallen from £655bn at the end of 2017 to £578bn at the end of June 2019. Pressure on fees has been intense and profit margins have fallen as well.

This week’s news that Aberdeen founder and SLA vice-chairman Martin Gilbert is to leave the business in 2020 isn’t a surprise, but it suggests that we could see a bigger shake-up over the next 12 months. Is this the right time to start buying?

Bargain or value trap?

I wouldn’t be against the idea of buying Standard Life Aberdeen shares at their current level. But I think there are a few things to note.

By my reckoning, the dividend has not been covered by earnings since 2016. That’s a warning flag that a cut might be needed. So far this has been avoided, thanks to cash from asset sales and a joint venture with Phoenix Holdings (which I rate highly).

However, at some point soon I believe earnings will need to cover the payout or else the dividend will be cut. As things stand, I think the valuation reflects market indecision. SLA shares are trading on 14 times forecast earnings with an expected dividend yield of nearly 8%.

If the dividend is cut, I’d expect the shares to fall. If earnings recover and the dividend is held, I’d expect the share price to rise.

I see Standard Life Aberdeen as a steady long-term income stock. But I think that investors looking for income and growth can probably do better.

A high-tech alternative?

Online derivatives trading platform CMC Markets (LSE: CMCX) is best known for its CFD and spread betting services. But the firm is diversifying into stockbroking and providing other financial technology services for institutional customers.

These services should help to offset the impact of regulatory changes that have hit the profitability of UK CFD platforms over the last year.

The good news is that CMC Markets still seems to be performing well, thanks to a core of high value professional traders who are exempt from the new rules. CMC shares are up by 6% at the time of writing after the firm said it expects revenue to be above £170m this year, compared to £131m last year.

Pre-tax profit is expected to increase, suggesting to me that this year’s results could be ahead of current forecasts.

CMC enjoys high profit margins and generates attractive levels of surplus cash. The shares currently trade on about 15 times forecast earnings, with a dividend yield of 3.5%. Analysts expect this payout to rise by 25% to give a yield of 4.5% next year.

I agree that there’s plenty of headroom for an increase. I see CMC Markets as a potential buy for dividend growth.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.