After climbing 50% in 6 months, are abrdn shares a buy for 2023?
With full-year results due on 1 March, abrdn (LSE: ABDN) shares have been climbing faster than the FTSE 100. Since a 52-week low in October 2022, they’re up more than 50%.
Some might think they’ve missed the boat and it’s too late to buy for recovery now. But I think looking at the longer-term view shows a different picture.
Despite recent gains, abrdn shares are still down 15% over the past 12 months. And we’re looking at a five-year decline of 50%. A couple of potential recoveries after the pandemic crash have failed to materialise too.
So are abrdn shares a buy now? I see one problem trying to answer that question, and I’m talking about valuation. For 2023, brokers have the stock on a price-to-earnings (P/E) multiple of a whopping 23. That’s way ahead of the long-term FTSE 100 average of around 14-15. And this is a troubled sector too, not a buoyant one.
Looking out to 2024, the P/E could drop to under 20 if the analysts are right. But that still looks like quite a heady valuation. The saving grace is the dividend yield, forecast at 7% for the next few years. Cover by earnings, though, could be weak.
I can’t help feeling that abrdn could be turning the corner. The firm was formed by the merger of Aberdeen Asset Management and Standard Life, both companies I’ve previously been bullish about.
But the merged firm saw outflows of cash, worsened by Lloyds‘ decision to move its funds elsewhere. Still, the Lloyds cash is all out now, completed in 2022.
The company has been refocusing its business in recent years. At the time of its H1 results, chief executive Stephen Bird said: “When I became CEO in late 2020 I said that we would pursue a strategy of diversification by refocusing our Investments business in to areas of strength, where we have scale and that lean into global growth trends and also significantly expand our reach into the higher growth UK wealth market.“
He reckoned that was going according to plan, and added: “The strength of our balance sheet means that we can continue to invest and reward shareholders.“
The firm completed a share buyback programme in December 2022. And it maintained its interim dividend at 7.3p per share. Taken together, that boosts my confidence in abrdn’s ability to meet its dividend expectations.
And that’s where I think the turning point might be. If there’s any need to reduce the dividend in the future, I could see investors deserting the stock again.
But if abrdn can return to paying progressive dividends, ideally above long-term inflation, I could see market sentiment turning positive. In the meantime, dividends are expected to be held steady. And those P/E valuations do look a bit high. So I reckon we could see a couple of years of uncertainty ahead, and perhaps more share price volatility.
But on balance, I’m bullish about abrdn. I think it could turn out to be a good buy for long-term, financial sector investors.
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- If I’d invested £1,000 in abrdn shares 3 years ago, here’s how much I’d have now
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Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group 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.