The abrdn (LSE: ABDN) share price has slumped 43% during 2022. Based on its dividend forecast for this year, the descent means abrdn shares now carry a 10.8% dividend yield.
A slightly lower dividend is predicted for 2024. But the yield still clocks in at a mighty 10.6%.
2022 has been a tough year for abrdn, epitomised by its relegation from the FTSE 100. However, should I buy the business to boost my dividend income?
Dividend forecasts
The company hasn’t grown the annual dividend for several years now. It froze the yearly payout at 21.6p per share just before the pandemic. Then it slashed the yearly reward to 14.6p in 2020 and has kept it there since.
City analysts are expecting the dividend to slip again in 2022, to 14.5p per share. A smaller 14.3p payout is predicted for next year too.
Dividend growth isn’t expected to return just yet, then. But on the plus side, abrdn still offers those market-mashing dividend yields.
Dividend cover
As an investor, however, I have to ask how realistic current projections are. And it’s my opinion that actual dividends might come in way lower than forecast.
Predicted earnings for the next two years come in way short of estimated dividends. The company is forecast to earn 9p per share in 2022 and 10.3p per share in 2023.
Ideally dividends should be covered at least twice over by expected earnings.
Asset sales
My fear is that abrdn’s earnings could come in even lower than the City predicts, too, giving it even less wiggle room to make financial payments.
The good news for investors is that it is boosting its capital strength through asset sales, and thus its ability to pay big dividends.
A month ago abrdn sold 43m shares in its Indian subsidiary HDFC Life to raise £262m. It still has a significant stake here which it can sell if it choose to. It is also rumoured to be considering offloading its holdings in life insurance business Phoenix.
The verdict
That said, there’s still a possibility that these actions might fail to prop up dividend forecasts anyway.
Firstly, profitability depends heavily on stock market performance. With inflation still soaring and central banks aggressively hiking rates, there’s a possibility share prices could continue falling in 2023.
The deteriorating competitive position of abrdn discourages me as well. Its baffling name change last year has done nothing to enhance the brand and attract clients in this ultra-competitive market. And I’m especially worried by the accelerating underperformance of its funds versus its rivals.
Just 57% of the company’s funds outperformed their benchmarks last year. This was down considerably from 71% in 2020.
I like the steps abrdn is taking to expand into other areas. Its acquisition of investment platform interactive investor for example could significantly boost its earnings potential over the long term.
But on balance, I think the risks the company presents to investors remain far too high. And given the fragility of current dividend forecasts, I’d prefer to buy other income stocks today.