With interest rates hitting new lows, the idea of earning an 8% income from a respectable name like Standard Life Aberdeen (LSE: SLA) is pretty tempting. But having considered the stock for my portfolio, I’ve decided that the Standard Life Aberdeen share price is probably low for a reason: I’m not sure that the dividend is sustainable.
Although I can see some appeal in this stock, I think there are a couple of things you should know before you decide whether to buy SLA shares.
Why I think the dividend might be cut
When Standard Life and Aberdeen Asset Management merged in August 2017, the plan was that Standard Life would sell its insurance business. The two companies would then form a super-sized fund manager, with attractive economies of scale.
The insurance sale worked out quite well. In exchange for its life insurance business, Standard Life Aberdeen received a £2.3bn cash payment and a 20% shareholding in specialist insurer Phoenix Group.
Management also released a further stream of cash by gradually selling the group’s stake in Indian life asset manager HDFC. This cash has supported some generous dividend payments and share buybacks. But ultimately these sales are one-off gains.
To measure how sustainable the dividend is going forward, I prefer to look at profits from continuing operations. According to the company’s figures, this measure of adjusted pre-tax profit has fallen from £1,039m in 2017 to just £584m in 2019.
That’s only just enough to cover Standard Life Aberdeen’s dividend, which cost about £490m last year.
New boss could cut payout
The company’s profits aren’t the only thing that’s been falling. Standard Life Aberdeen’s share price has halved since the merger. Unsurprisingly, new chairman Sir Douglas Flint has decided that a change of chief executive is needed.
Former banker Stephen Bird joined SLA on 1 July and will take over fully after a handover period. I suspect that one decision he might take early on is to cut the dividend to a level that’s covered by underlying earnings — something that’s not true at the moment.
If that happens, I could see Standard Life Aberdeen’s dividend yield falling from 8% to between 4% and 6%. Not bad, but a big reduction.
The Standard Life share price could stay low
At the start I mentioned two reasons to avoid Standard Life Aberdeen shares. The risk of a dividend cut is one reason. The second is simply that I don’t know how much value this business has to offer.
Mr Bird’s job will be to find a way to generate growth from SLA’s main asset management business. But this is a tough sector where profit margins are generally falling due to competition from cheap passive funds.
The investment performance of SLA’s funds has not been outstanding in recent years. Finding an edge won’t be easy. Mr Bird has spent a lot of time working in Asia, so this might be one route to growth. But entering new markets is also a tough challenge.
Ultimately, I think there’s a risk that this turnaround won’t turn. The Standard Life share price could stay low for several more years before performance improves. Although this should be a good income stock for long-term investors, I’d prefer to put my money in companies with a stronger track record.