- Large weighting towards not particularly profitable activities
- Payout ratio depends on how quickly cost-to-net-income ratio falls
Managing the turnaround of a super tanker-sized asset manager was never going to be easy and the newly branded Abrdn (ABDN) (formerly Standard Life Aberdeen, and now probable winner of a Consignia corporate branding award) made it clear in its half-year results that investors who expected a higher dividend will either have to wait, or by implication, go somewhere else to find one.
The key to being able to offer a dividend higher than the capped 14.6p a share is whether Abrdn can get its capital generation to cover the dividend payment by 1.5x.
In the half, the company managed a payout ratio of 1.14x, with the cash sum totalling £154m. How management will achieve this target is dependent on how quickly Abdrn’s cost-to-net-income ratio falls. Currently, this is a stubbornly high 79 per cent, which management wishes to reduce to 70 per cent by the end of 2023. To put this into context, Schroders (SDR), arguably the gold standard for asset managers, has a cost ratio of just 67 per cent.
Part of the problem is that Abrdn has a large weighting towards not particularly profitable activities – managing money market funds, fixed income, corporate balances – where the fees are small, but the fixed costs are still high. The answer in the long term will be to reduce these activities significantly, probably in favour of opening more mutual-style funds for the retail market. To that end, the outflow of funds in the half can be interpreted as a net positive as most of £5.6bn comprised of withdrawn corporate funds as companies invested in their activities through the latter half of the pandemic. If that trend continues, then Abrdn’s cost ratio will fall organically, although probably not quickly enough to meet the 70 per cent target by the end of the two-year deadline, without deliberate action. Total assets under management were £532bn, down 1 per cent on 2020, while total fee income was up 8 per cent to £490m.
From an investment perspective, on some measures Abrdn does not perform badly. For example, it has a better return-on-employed capital percentage than Schroders (SDR) – 6.4 per cent versus 2.52 per cent – but fails consistently on earnings growth. The reality is that if Abrdn was liquidated tomorrow, investors would get just a bit more than their equity stake back, whereas for shareholders in competitors that could be three or even six times the value of their holdings. Sell.
Last IC view: Sell, 264p, 9 Mar 2021
|ORD PRICE:||298p||MARKET VALUE:||£6.5bn|
|TOUCH:||298-299p||12-MONTH HIGH:||333p||LOW: 205p|
|DIVIDEND YIELD:||4.9%||PE RATIO:||5|
|NET ASSET VALUE:||307p*||NET CASH:||£1.34bn|
|Half-year to 30 Jun||Total Income (£bn)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*Includes intangible assets of £674m, or 31p a share|