The abrdn (LSE: ABDN) share price has risen by 40% since the start of October. After a five-year slump, have we seen the bottom for this troubled asset manager?
abrdn’s rebound meant that the firm rejoined the FTSE 100 at the end of last year. The stock also offers a market-beating 7.5% dividend yield, which is expected to be maintained.
There are still some risks for investors. But on balance, I think abrdn shares definitely have some attractions at current levels. Here’s why I’m viewing the stock as a potential buy in 2023.
No more bad news?
When Standard Life merged with Aberdeen Asset management in 2017, investors hoped the combination would create a powerhouse asset manager with economies of scale.
The reality was that combining these two businesses simply created a new set of problems.
Between the start of 2018 and June 2022, abrdn’s assets under management fell from £608bn to £508bn. Profits have been inconsistent.
However, the situation is changing and turnaround plans are under way.
Since taking charge in 2020, CEO Stephen Bird has led plans to streamline the group’s fund management operations, invest in wealth management, and establish a clear programme of capital returns.
Progress could be richly rewarded
Right now, I think the market is watching abrdn carefully to see if Mr Bird can deliver on his promises.
A lot of bad news is already priced in to this stock. We can see this from abrdn’s 7.5% dividend yield. Rivals such as Jupiter and Liontrust both offer yields of around 6%. FTSE 100 peer Schroders offers just 5%.
If abrdn’s results do improve, I think its shares could perform well.
For example, a 25% share price increase would bring the stock’s dividend yield down to 6%, based on the current payout.
I think that’s a reasonable scenario for the next 12-18 months, although it’s certainly not guaranteed.
Too cheap to ignore?
Asset management stocks are not very popular at the moment. Last year’s falling markets caused fee income to fall, as asset values fell and investors withdrew cash.
2023 won’t necessarily be much easier, but even so, I think abrdn looks cheap. Here’s why.
In the firm’s half-year results, the company said its investments in FTSE 100 insurer Phoenix and Indian financial group HDFC were worth £1.7bn. In addition to this, management said that abrdn had £0.6bn of surplus capital.
Subtracting these numbers from the group’s market cap of £3.8bn suggests that abrdn’s remaining fund business and wealth management platform — including Interactive Investor — are being valued at just £1.4bn.
That looks cheap to me, for a business that generates around £300m of operating profit and has over £500bn of assets under administration.
The firm isn’t out of the woods yet. There’s a clear risk its turnaround will disappoint. That could trigger another change of management and further uncertainty.
However, as things stand today, this business offers an attractive 7.5% dividend yield, supported by some attractive investment assets.
If abrdn’s fund management and wealth operations can deliver a return to growth, I think the shares could perform well from current levels.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management Plc, Liontrust Asset Management Plc, and Schroders Plc. 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.
Motley Fool UK 2023