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The Jupiter dividend yield could sink. Here’s why

Autumn season in the night sky

As a shareholder in Jupiter (LSE: JUP), I appreciate its meaty dividend. The Jupiter dividend yield is currently a jaw-dropping 17%.

But that could be set to fall – perhaps dramatically. Below I explain why, and the reason I will keep holding Jupiter shares.

Tough times for asset managers

In line with many of its peers in the UK asset management sector, Jupiter has been battling challenging business conditions. A weak economy can lead to investors withdrawing funds, hurting revenues and profits.

Assets under management at Jupiter fell 19% in the first half. Partly that reflects market valuation movements. But alarmingly the fund saw net outflows of £3.6bn. The rot continued last quarter, with a further £0.6bn of net outflows. That matters because a smaller base of assets under management typically hurts a manager’s ability to generate profits.

New dividend policy

Despite its weak business performance, Jupiter stuck to its dividend policy and the interim payout matched last year’s.

Last month, however, the company announced a new capital allocation policy. Part of that is a share buyback programme of up to £10m, which has already begun. I see that as positive – the Jupiter share price has been battered so now strikes me as a good time for the company to buy and cancel some of its shares.

Part of the new approach involves resetting the ordinary dividend policy to 50% of pre-performance fee earnings. That means it may move around more than before, as fee earnings are unlikely to be constant from year to year.

Crucially, the Jupiter dividend “will no longer be subject to a minimum of the prior year amount”. Jupiter’s annual basic dividend has been maintained for years, although the split between the interim and final payments has changed. The new policy means that the company will no longer aim to match the previous year’s dividend and instead base the payout on earnings.

Where now for the dividend?

In practice I expect that to mean that next year’s dividend falls, perhaps sharply.

Unhelpfully, “pre-performance fee earnings” did not appear as a phrase in last year’s final results or this year’s interim ones. But “underlying earnings per share excluding performance fees“ last year came in at 24.1p. If that is a rough proxy for the new measure, the annual basic dividend per share would have been around 12p compared to the 17.1p that was paid out last year under the current dividend policy. Given the decline in business, I expect 2022 earnings to be below 2021 levels.

On the plus side, the new policy may lead to a dividend increase if earnings are strong enough. Jupiter may be able to use its strong brand to attract new clients and stem the outflow of funds. I expect long-term demand for financial services to be robust even if it dips during this recession.

I’m holding

Although I would be disappointed to earn smaller Jupiter dividends, for now I plan to hold the shares. Even after a cut, the yield could still be substantial.

The introduction of the new policy suggests the company’s new management is serious about recognising the challenges currently facing Jupiter. Hopefully they will take more steps to address them, which could help turn around the recent poor performance.

The post The Jupiter dividend yield could sink. Here’s why appeared first on The Motley Fool UK.

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C Ruane has positions in Jupiter Fund Management. The Motley Fool UK has recommended Jupiter Fund Management. 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.