With a blockbusting dividend yield of 8.4%, Abrdn (LSE: ABDN) shares are hard to ignore. Yet a sky-high yield is often a sign of a struggling company, and that applies here. Abrdn shares have crashed almost 60% in the last five years, and fallen 32.13% over the last 12 months.
Abrdn may be down but it is far from out. Investors are taking a shine to it again, with the share price picking up in recent weeks. The reason for this recovery looks pretty clear to me.
Abrdn shares offer amazing income
Abrdn is an asset manager, and as such acts as a geared play on the stock market. When investors are nervous and markets are down, I would expect its share price to fall harder and faster. When sentiment picks up and markets climb, it should lead the charge. Accordingly, the FTSE 100 is up 4.82% in the last month, but Abrdn is up a thumping 27.66%.
Investors have one eye on the end of the year, when they hope to see a Santa rally, as central bankers slow down on the interest rate hikes. Yet this is far from a done deal. Inflation hasn’t started falling yet and until it does, the US Federal Reserve in particular will remain hawkish.
Investors are playing a dangerous game trying to second-guess central bankers. They got it wrong in the summer, getting sucked into a bear market rally of their own making.
I don’t try to time the market in this way. I’m just happy to pick up top companies at low valuations. Abrdn trades at 12.5 times earnings, which is cheap but not dirt-cheap. Worryingly, its forecast price-to-earnings (P/E) is a pricey-looking 20 times.
Analysts expect the group’s earnings per share to fall by 37.4% next year, which isn’t good. Abrdn has seen a surge in net outflows, as shell-shocked investors run for cover. These hit £35.9bn in the first half of the hear, up from £5.6bn a year earlier.
The majority of this is down to the final £24.4bn tranche of Lloyds Banking Group’s withdrawal, triggered by the misfiring Standard Life merger. Not all of it though. Either way, Abrdn saw first-half adjusted pre-tax profit falll from £163m to £99m.
Yield is poorly covered
Abrdn has been sorting itself out following the merger. Earnings should also be boosted by its takeover of fund platform Interactive Investor, which should make a full contribution to second-half revenues.
Ultimately, much will depend on when the stock market recovery comes, as that will surely give Abrdn a lift. Yet I do have one big worry. Its huge yield is now covered just once by earnings. That is forecast to fall to 0.6 next year. This suggests the current payout is not sustainable, unless earnings rise sharply, which is not to be relied upon.
Plenty of cheap FTSE 100 stocks offer high yields right now, and most come with far superior cover. Aviva, Taylor Wimpey, and Rio Tinto immediately spring to mind. I’d buy them before taking a punt on Abrdn. However, I accept that I might regret it when the market rally finally arrives.
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Harvey Jones holds shares in Rio Tinto. 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.