The abrdn share price (LON:ABDN) has experienced a selloff in recent weeks. In turn, its dividend yield has grown even greater, reaching a sizeable 8.2%. This puts abrdn shares among the top dividend-payers on the FTSE 100.
The sell-off in abrdn shares (LON:ABDN) the run-up to its H1 results has continued since. The investment management firm reported mixed results, but due to the prevailing negative investment, the abrdn share price tanked. Consequently, the stock is now down 20% over the past month. Core to the sell-off was the £4.4bn fall in assets under management (AUM) amid a broadly challenging investment and economic climate.
However, one mixed half shouldn’t be enough to write off a stock. As Warren Buffett states, “bad news is an investor’s best friend”. So, should investors see this as an opportunity to buy an investment behemoth with £496bn under management? As the abrdn share price pushes lower, three things stand out:
The abrdn share price trades at 17.3x earnings, a premium to the FTSE 100 and competitor in the brokerage business, Hargreaves Lansdown;
abrdn shares offer one of the largest dividends on the index at 8.2%;
Market conditions have a negative impact on the abrdn share price.
Given the economic environment, characterised by the cost-of-living crisis, rising interest rates, and volatility in financial markets — customer outflows and a fall in AUM were to be expected. Analysts’ forecasts suggested an average AUM of £ 500bn for the period, so the underperformance is disappointing. But, it still represents less than a 1% decline in AUM. So, the negative reaction on the abrdn share price may be a bit of an overreaction.
In turn, the company reported a 15% decline in net operating revenue to £466m. This was due to the lower average AUM and net outflows, particularly in equities as client asset allocation moved to debt products and cash in the rising interest rate environment. Nonetheless, the fall in investments was offset by growth in the adviser and personal arm. This resulted in net operating revenue growth of 4%.
More positively, adjusted operating profit was up 10% at £127m, and adjusted capital generation surged 33% to £142m. This saw abrdn realise IFRS losses before tax of £169m, reflecting £320m of adjusting items. A large part of this was accounted for by a £181m reduction in the value of the listed stakes held on the balance sheet as a result of their falling share prices over the six-month period.
Are abrdn shares in a cyclical cycle or slow decline?
Investors frequently misjudge the dynamics of cyclical businesses, and abrdn may prove to be a notable example. Its performance is intricately tied to market conditions. During favourable market periods, investors allocate funds for management by the group and vice-versa during poor conditions. As the abrdn share price indicates, the market is currently in a downward part of the cycle.
That said, the prevailing high inflation and interest rate environment poses challenges for abrdn’s operations. In this context, the attractiveness of cash has risen due to its increasing return-generating capacity. This situation presents the business with obstacles stemming from the current macroeconomic landscape, where the traditional appeal of their services might be impacted by the trends in inflation and interest rates.
As such, it’s possible to see how abrdn could benefit from an improving macroeconomic outlook and falling interest rates, which should start to take place towards the end of 2023 and the start of 2024. Therefore, it seems unlikely that the abrdn share price will tank a lot more from its current levels. It’s simply just struggling in the current macroeconomic environment, as is non-traditional brokerage Hargreaves Lansdown.
Investors may be enticed by the strong dividend yield and the promise of potential upside, but it’s not clear-cut. For instance, it’s worth noting that the fund’s interim dividend of 7.3p is only covered at 1.0x by adjusted capital generation. And if dividend payments are cut, it could do further damage to the abrdn share price.
What’s more, its investment business may take some time to recover. Interest rates are anticipated to fall slowly to 2.5% in 2025, but even at such levels, cash remains attractive which could continue to hamper the conglomerate’s performance. For that reason, the abrdn share price may have limited upside from its current levels, or at least in the medium term. But that could all change if rates fall faster than expected.
Please note: Share tips are not personal recommendations or advice and should never be treated as such.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.