At the time of writing, the Standard Life (LSE: SLA) share price supports a dividend yield of 7%.
In the current interest rate environment, this level of income looks exceptionally attractive. However, generally speaking, when a company supports a dividend yield that’s significantly higher than the rest of the market, there is a good chance that the payout is not sustainable.
I do not believe that this is the case with Standard Life. I think this level of distribution is sustainable based on the company’s asset sales, international diversification and value of assets under management.
Standard Life share price income
Standard Life is one of the largest pension and asset management groups in the UK. A few years ago, the company combined with Aberdeen Asset Management to boost its fund offering for investors both inside and outside the business. This combination helped the business achieve substantial economies of scale, which has led to significantly reduced costs.
To help improve the efficiency of the overall business, management has also been divesting some of the group’s international operations. These operations, such as Standard Life’s Indian business, provide diversification. Nevertheless, I think they also distract management from the core business, which is where it should be spending its time and effort.
As such, I’m encouraged by management efforts to divest these businesses and return the proceeds to investors. Over the course of the past 12 months, the enterprise has been selling down its ownership of its Indian subsidiary and using the proceeds to repurchase Standard Life shares. By reducing the number of shares outstanding, the value of profits and income for the remaining investors will increase.
These assets sales are also unlocking capital to fund the group’s dividend. That’s a significant reason why I’m optimistic about the outlook for the payout.
To help complement growth at its existing business, Standard Life is investing in its wealth management operation. The company is the fourth largest wealth management business in the UK. In my opinion, it has failed to capitalise on this during the past few years. Wealth management can offer higher profits than fund management. Further, Standard Life is one of the most trusted financial brands in the country, which should give it an edge over competitors.
The business has now doubled down on this initiative. I’m confident the company can grab and even more significant market share in the years ahead. This is another reason why I’m optimistic about the outlook for the stock in the long run.
All in all, I’m confident the current Standard Life share price can produce large total returns in the years ahead. The combination of the company’s 7% dividend yield and potential earnings expansion from new growth initiatives could provide me with attractive income and capital growth returns in the medium term.
Rupert Hargreaves owns shares in Standard Life Aberdeen. 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.