I’m looking to add quality UK shares to my holdings that would boost my passive income stream through dividend payments. I noticed that Jupiter Fund Management (LSE:JUP) has seen its share price fall recently and its dividend yield looks enticing. Should I buy the shares or could it be a value trap?
Jupiter shares continue to slide
As a quick reminder, Jupiter is a fund management business that manages equity and bond investments for private and institutional investors. It currently has assets under management of over £55bn.
So what’s happening with Jupiter shares currently? Well, as I write, they’re trading for 139p. At this time last year, the stock was trading for 285p, which is a 51% drop over a 12-month period.
It is worth noting that many UK shares have fallen in recent months. This has been due to macroeconomic headwinds such as soaring inflation and rumours of a recession. Furthermore, the tragic events of Ukraine have had a negative impact on indexes across the world.
Risky business
The main issue with fund management businesses is that in times of economic crisis, such as now, investor confidence can dwindle. This is usually linked also to investors pulling out funds.
During the first quarter of this trading year, Jupiter saw customers pull out close to £1.6bn more in funds than went in. If the economic picture worsens, investors may pull out more. This could have a negative impact on performance, investment viability, and returns.
The economic picture in the UK is not a pretty sight currently. The cost-of-living crisis, caused by soaring inflation and rising prices, could be one of the major causes of funds being pulled by investors. This is something I will keep an eye on.
The bull case and my verdict
At current levels, Jupiter’s dividend yield stands at a very tempting 12.2%. As the shares have continued to slide, they look good value for money on a price-to-earnings ratio of just seven.
Both these things help build my bull case. In addition to these, I looked back through Jupiter’s dividend and performance record. I do understand that past performance is not a guarantee of the future, however. It has maintained its basic dividend for a few years now. It did not pay a special dividend but I see that was due to a change in tack whereby it is offering share buybacks instead. This could be seen as advantageous, especially as the current shares look dirt-cheap.
Jupiter has been able to comfortably cover its basic dividend based on its current earnings per share. For these reasons, I don’t think Jupiter will cut its dividend any time soon.
When shares fall, and a dividend yield is pushed up, it can often signal a value trap. I don’t think this is the case for Jupiter. Looking at its assets under management, dividend coverage, profile as a business, recent performance and current economic outlook, I think the shares look like a steal right now.
I own shares in rival fund manager M&G, which also offers a tasty dividend yield of over 9%. I’d add Jupiter shares to my holdings too although I wouldn’t be surprised to see some short-term pain based on the economic situation at present.