Shares in emerging markets-focused asset manager Aberdeen Asset Management (LSE: ADN) (NASDAQOTH: ABDNF.US) slipped this morning — down by 3% at the time of writing — thanks to a lacklustre trading statement.
Aberdeen said that total assets under management (AuM) fell by 0.6% to £322.5bn, mainly due to a £4bn withdrawal by a single client, without which AuM would have been broadly unchanged.
However, the firm said that the large withdrawal was mainly from low margin funds, and highlighted £2bn of newly-agreed client investments that have not yet been funded.
Stick with fundamentals
I believe the underlying trend remains positive at Aberdeen, and that the firm remains a good quality dividend growth opportunity, for three key reasons:
1. Minting cash
One of the most attractive features of Aberdeen’s business is its cash generation. Capital expenditure is very low, as the firm’s main assets are its employees, and virtually all of the firm’s operating profit is converted into free cash flow.
For example, in 2013, the firm reported operating profits of £396.8m, and generated free cash flow of £343m. Of this, £316m was returned to shareholders, through share buybacks (£139m) and dividends (£177m).
2. Highly profitable
Aberdeen’s profit margins are high, too: the asset manager’s operating margin rose to 45% last year, excluding exceptional costs.
High margins are sometimes a cause for concern, as they tend to attract additional competition, but Aberdeen’s growing scale should help protect the firm’s margins
That said, it’s worth noting that Aberdeen’s 0.5% average fee rate is more than double the 0.17% average of Aberdeen’s latest acquisition, Scottish Widows Investment Partnership. Scottish Widows assets account for approximately 40% of Aberdeen’s total AuM, and could lead to some dilution of Aberdeen’s fee rates.
3. Income growth
Aberdeen has a strong track record of shareholder returns. The firm’s dividend has risen by an average of 22% per year over the last six years, rising from 5.8p in 2008 to 16p in 2013 — a 175% increase.
Despite this, last year’s payout was covered 1.6 times by earnings and 1.8 times by free cash flow.
Aberdeen shares currently offer a prospective yield of 3.9%, which is expected to rise to 4.5% in 2015.
Although I believe Aberdeen Asset Management is an attractive buy, it isn’t without risk. The company could fail to generate the AuM growth that investors are counting on, and it could see further dilution of its average profit margins.