FTSE 100 fund manager Abrdn (LSE: ABDN) has just agreed a £1.5bn deal to buy DIY investment platform Interactive Investor. However, shareholders don’t seem too keen. The Abrdn share price has fallen by 10% since the deal was first reported on 8 November.
This latest slide means that Abrdn stock has fallen by 20% over the last year. I’m wondering if this could be a good opportunity for me to start buying the stock. After all, Abrdn shares now offer a 6% dividend yield. If the Interactive Investor deal is successful, growth could accelerate over the next few years, too.
Why buy it?
Abrdn has been struggling with growth since the business was created in 2017 through the merger of Aberdeen Asset Management and Standard Life. Shares in the combined company have fallen by 45% since 2017, reflecting the market’s downbeat view of this business.
Chief executive Stephen Bird is betting that one way to solve this problem is to tap into the growing demand from investors who want to manage their own cash. The deal to buy Interactive Investor means that Abrdn will become the number two player in the UK direct investing market.
Interactive Investor has 400,000 customers with an average of £135,000 under management each. That gives it a total of around £55bn of assets — enough to give the business a 20% share of the UK market, just behind Hargreaves Lansdown.
Like Hargreaves, it’s also very profitable. Last year, a 34% profit margin allowed the business to generate a pre-tax profit of £46m. That would have increased Abrdn’s 2020 profits by almost 10%.
Are Abrdn shares cheap?
The big problem for Abrdn is that it keeps losing funds under management. In 2019, the net outflow from its funds was £58.4bn. In 2020, the outflow was £29.4bn. During the first half of 2021, it was £8.3bn.
When assets under management are falling, revenue also tends to fall. To offset these losses, Abrdn has been cutting costs and gradually selling its stake in Indian insurer HDFC. These measures have provided support for the group’s dividend, but they aren’t a long-term solution.
I think this is why Abrdn shares do look quite cheap. The stock’s 6% dividend yield is nearly twice the FTSE 100 average. Abrdn’s share price of 227p is also below the company’s book value of 307p per share — a commonly used value indicator.
Would I buy Abrdn shares now?
Sometimes shares are cheap for a good reason. I think that might be the case here. Although I’m encouraged by the potential of Interactive Investor, I’m also aware that big mergers and takeovers don’t always have a great record of success. Abrdn itself is an example of this, in my view.
For now, the 6% yield looks safe enough to me. I might consider the stock for as a high-yield investment. But I’d want to keep a close eye on the company’s progress. If this business doesn’t return to growth soon, then I think the share price could fall even lower.