An investor who spent £1,000 on Abrdn (LSE: ABDN) shares at the start of 2022 would have just £630 today, including dividends. Shares in the Edinburgh-based fund manager have now fallen by 70% over the last five years.
However, press reports suggest that a £500m shareholder return could be on the way for Abrdn’s long-suffering shareholders. With the shares trading at a discount to book value and offering a forecast dividend yield of almost 10%, I can see how the shares might look like a tempting buy.
Unfortunately, I think there are good reasons why Abrdn’s share price has been falling.
Why is Abrdn doing so badly?
Broker forecasts suggest Abrdn will report adjusted earnings of just 9.4p per share this year. That’s little more than half of the 17.8p per share reported in 2018.
One problem is that Abrdn’s earnings are linked to the performance of the stock market. Fund managers’ fees are generally based on the value of the assets in their funds. When shares prices fall, fee income generally falls.
More broadly, rising interest rates mean that the yield available from low-risk assets such as government debt is rising. When this happens, investors normally expect higher yields from riskier assets like shares, too.
In my view, rising interest rates mean that share prices may remain weak for a while. This could make it difficult for Abrdn to stage a comeback.
A £500m shareholder return?
Abrdn has continued paying generous dividends despite its falling earnings. This has been possible because the company has been able to return surplus capital to shareholders.
One big source of cash has been Abrdn’s stakes in Indian insurer HDFC and FTSE 100 life insurer Phoenix. The company has gradually been selling its shares in these insurance companies, most recently collecting £262m on the HDFC share sale last week.
A recent report in the FT has suggested that Abrdn’s management is now planning to speed up these share sales, in order to return up to £500m to shareholders by the end of this year.
The returns could be made through share buybacks or a special dividend, according to the report. My sums suggest that £500m would be equivalent to around 23p per share. That’s around 16% of the current share price.
Abrdn shares: what I’m doing
I can see the logic behind Abrdn’s ongoing share sales. Owning big stakes in insurance companies isn’t really part of the company’s business model.
The problem I have is that it feels a bit like Abrdn is selling off the family silver in order to keep shareholders happy, despite the company’s poor performance.
Abrdn recently bought DIY investor platform ii as part of a move to expand into wealth management and financial advice.
However, chief executive Stephen Bird admitted in August that uncertain market conditions mean that it will take longer than expected to deliver on the group’s revenue and profit targets.
I think the headwinds facing Abrdn could continue for longer than expected. Selling assets to raise cash may provide a one-off boost, but it’s no substitute for genuine business growth.
I don’t see any reason to rush into buying Abrdn shares at the moment. I’m going to stay on the side lines for now.