I’ve been looking to buy some more dividend stocks recently, as dividends are extremely valuable when markets are choppy. Should I buy abrdn shares though? Let’s discuss.

Are the shares worth buying?

Looking at abrdn today, I can’t say I’m particularly excited about the stock. For starters, the company doesn’t have much momentum right now. For the first half of 2022, it reported:

• Fee-based revenue of £696m, down 8% year on year

• Adjusted operating profit of £115m, down 28% year on year

• Adjusted diluted EPS of 3.7p, down 47% year on year

• Assets under management of £508bn, down from £542bn at the end of 2021

Overall, performance in H1 was poor. Of course, things could improve if global stock markets begin to rise again. However, there’s no guarantee this will happen any time soon.

Dividend cut?

Secondly, the dividend looks at risk of a cut. As I mentioned earlier, it paid out dividends of 14.6p per share last year. However this year, earnings per share (EPS) are only expected to be 8.7p. This means that they won’t cover the dividend.

It’s worth noting that in the first half of the year, adjusted capital generation amounted to £107m. Yet the company paid out £154m in dividends for the period. In other words, the company didn’t generate enough capital to cover the dividend.

This leads me to believe the firm may have to reduce its dividend soon.

Lack of competitive advantage

Another issue for me is the lack of competitive advantage. abrdn operates in a very competitive industry and doesn’t appear to have an edge over its competitors. This is illustrated by the fact that for the five-year period to the end of June, just 34% of its equity funds outperformed their benchmarks. With that kind of performance, it could lose market share to passive management providers such as iShares.

High valuation

Finally, the company’s shares aren’t cheap. Given that analysts expect EPS of 8.7p this year, the forward-looking price-to-earnings (P/E) ratio here is about 18.4. That’s significantly above the median FTSE 100 P/E ratio. So I don’t see much value on offer here right now.

My move now

Now I don’t want to sound too bearish on abrdn shares. One reason to be optimistic here is that the asset manager is shifting its focus to high growth areas such as real assets and alternatives. This is a smart move, to my mind.

Another reason to be optimistic is that a top-level insider (the CFO) bought some shares in the company recently.

However, overall, I don’t see enough appeal in the stock to buy it. All things considered, I think there are better dividend stocks to purchase for my portfolio today.

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.

In the first half (H1) of 2022, the firm recorded a total pre-tax loss of £320m. Fee-based revenue dropped 8% to £696m and adjusted operating profits fell 28% to £115m. 

As a result, Abrdn shares are down 47% in 12 months and 42% so far in 2022.

This prompted a demotion from the FTSE 100 in September and the investment firm is now a part of the mid-cap FTSE 250 index. 

But things could be changing. Abrdn shares are up 8% in the last week. Could this beaten-down stock present a mixture of growth and value, factoring in this historic decline and the 10.7% dividend yield? Let’s find out. 

Cheap or a value trap?

Most shares that fall nearly 50% in a year will appear cheap on paper. Looking at the performance of Abrdn shares performance over time, it is clear that the firm has declined steadily since hitting an all-time high of 571p in 2015.

The company has undergone many changes over the last decade, including a merger and subsequent sale of the Standard Life business, several high-profile boardroom changes, and a rebranding effort.

Most investment firms are struggling at the moment. The larger economic collapse in the UK has caused trading volumes to drop. 

This marketwide pullback caused Abrdn’s assets under management (AUM) to fall £34bn in H1 2022. Despite this, the company has managed to hold on to its position as one of the largest asset managers in the UK. 

And I think the latest collapse in Abrdn shares is primarily due to current market conditions rather than a failing business model. This is why I still hold on to my opinion that it is a bargain right now.  

Positives and verdict

Abrdn has been a consistent dividend payer for over 15 years now. In July 2022, the company managed to roll out a share buyback worth £300m. The board also announced its plans to return £500m to shareholders after the firm was removed from the FTSE 100 last month. 

The firm has also changed how it uses excess cash. While many analysts questioned the acquisition of Interactive Investor for £1.5bn, the firm has also been shedding excesses to generate more cash. 

Heading into H2 2022, the investment firm sold two of its stakes in HDFC for about £500m. The company also sold £300m worth of Phoenix Group shares to fund the aforementioned share buyback program.  

This makes me optimistic that the company plans on maintaining a decent dividend going forward. While the current yield of 10% might be unsustainable given falling profits, I think the annual yield will remain higher than the FTSE 100 average of 3.5%. 

When the economy recovers, I expect large asset managers to recover quickly. Given its current sky-high yield and history of shareholder returns, I think Abrdn shares currently offer a nice mix of growth potential and value. I am wary of further economic turmoil in the UK, which is why I am looking at a £1,000 lump sum investment when conditions stabilise. 

One of my primary passive investment strategies involves finding good quality companies that offer a high dividend yield. This can act as a great form of diversification within a portfolio, as a steady stream of additional income can help to offset short-term share price falls.

I have found that the UK’s second largest index, the FTSE 250, is often a good source of high dividend-yielding companies. Although, this yield alone is often not enough to warrant adding a share to my portfolio.

abrdn

The first company on my list is abrdn. The company provides a variety of investment services, primarily global asset management. It has had a difficult time in the last few years, falling 42.9% in 2022. Furthermore, the share is down almost 60% from pre-pandemic levels.

From an income perspective, the most appealing aspect of this share is the 10.6% dividend yield. This far exceeds the current index average of 3.3%, and is very tempting on the surface. The company has also paid a dividend consistently for 16 years, which is another good sign.

However, this is not the full story, as the company has struggled with earnings over the last few years. Headline earnings and cash generation have fallen considerably. This has consequently impacted its dividend-paying ability, with a dividend cover of just 0.6, meaning that it will struggle to pay dividend at this current level.

As a result, I would not currently consider adding abrdn to my portfolio, despite the attractive dividend yield.

Royal Mail Group

The second company on my list is Royal Mail Group, arguably one of the most well-known publicly listed companies in the UK. Its main business sectors are UK postal and delivery services, along with non-UK equivalents. Despite a very strong 2020 and 2021, the company has suffered in the last year, down 61.2%.

As with the previous example, the company offers a very enticing dividend, with a yield of 10.2%. This level once again is far in excess of the index average, and the yield is forecast to increase by over 8% in the next year.

Unfortunately, on further inspection, this may not be as good of an opportunity as it seems. The company has experienced declining profitability, and debt levels have soared. Despite the history of consistent dividend payments, these underlying fundamentals are not encouraging.

For that reason, I would also not be tempted to add Royal Mail Group to my portfolio as an income-generating share.

Ashmore Group

The final share on my list is Ashmore Group, an asset management company focusing on emerging market assets. The company has fallen 27.1% in 2022, marking three years of poor share price performance.

The dividend of 8% is not the most extreme on the list, but still comfortably in excess of the FTSE 250 average. I am encouraged by the company’s track record, consistently paying dividends over 16 years. However, it too has struggled with earning declines, and dividend affordability may start to come into question.

Although Ashmore Group is probably the most tempting of the three to add to my portfolio, I am still not persuaded due to the underlying fundamentals.

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.

Here, I’m going to highlight some interesting director dealing I’ve spotted recently. Should I follow these insiders into these stocks?

£99k buy from the CFO

Let’s start with asset manager abrdn (LSE: ABDN). Here, CFO Stephanie Bruce bought 66,709 shares at an average price of 148p on 5 September. This purchase cost the insider around £99,000.

I think it’s significant that abrdn’s CFO has bought stock. Finance chiefs are top-level insiders and they generally have an excellent understanding of their companies’ operating activities and financials. I also think it’s interesting that Bruce has invested nearly £100k in stock. This suggests she’s quite confident Abrdn’s share price is set to rise.

However, it’s worth pointing out that she also made large purchases in March and December when the stock was trading at much higher levels. So her track record, in terms of timing, isn’t great.

Would I buy abrdn shares today? The answer to that is no. The stock does offer a high yield. However, I have a few concerns in relation to the company’s competitive advantage.

It’s worth noting that analysts at Deutsche Bank just downgraded the stock from ‘hold’ to ‘sell’.

Purchases from the CEO and CFO

Next up is housebuilder Vistry (LSE: VTY). Here, both CEO Greg Fitzgerald and CFO Earl Sibley bought stock on 8 September when it was trading at 804p. Combined, the two insiders spent around £248,000 on stock.

So now we have two top-level directors buying stock. That’s notable, to my mind. The more insiders buying, the more powerful the trading signal.

Vistry shares do look cheap at present. Currently, they trade at just five times this year’s earnings forecast. So there could be some value on offer here right now.

Having said that, I see this stock as quite risky, given current economic conditions. In recessions, housebuilders tend to underperform.

Given the risks, I think the safest move for me is to leave this stock alone for now.

£102k buy from a clued-up director

Finally, AIM-listed Alpha FX (LSE: AFX). It saw a £102,000 buy from board member Lisa Gordon on 13 September.

This director dealing activity looks really interesting to me due to the fact that Gordon has an investment background. Earlier in her career, she worked as an equity analyst. Meanwhile, she is also Chair of stockbroker Cenkos Securities. So we can assume she knows what she’s doing here.

Alpha FX continues to grow at a strong rate. Recently, the group posted revenue growth of 35% for the first half of 2022. And founder and CEO Morgan Tillbrook was very optimistic about the future.

“Although much of the world is moving into a challenging macro environment, I have never felt more confident about the potential of the business and our long-term growth prospects,” he said.

Putting this all together, I’d buy Alpha FX shares for my portfolio today. The stock isn’t cheap, so there is some valuation risk. However, all things considered, I see the risk/reward proposition here as attractive.

abrdn shares have been falling all year. And on Wednesday morning, they dropped another 4% in response to the latest UK inflation data.

The investment management business is going through a tough patch. And first-half results for abrdn didn’t look pretty.

Fee-based revenue fell by 8% compared to the same period last year. When share prices are falling, investment managers can’t charge as much in performance-related fees. They also lose out when customers withdraw funds, and that’s been happening too.

Lloyds withdrawal

The company took a big hit when Lloyds Banking Group withdrew £24.4bn in the half. That’s due to a dispute stemming from the merger of Standard Life and Aberdeen Asset Management to create the current firm. Lloyds saw a conflict of interest.

But the good news is that’s the last tranche of Lloyds money. And to put it into perspective, abrdn’s remaining assets under management still totalled £508bn.

The bottom line showed an IFRS loss before tax of £320m, which looked bad. But abrdn put that down mainly to “the change in fair value of our significant listed investments in the period“. The company recorded an adjusted operating profit of £115m.

There are good reasons to avoid investing in abrdn shares. Well, for short-term investors, for sure. The big investing firms rarely look beyond the next quarter or two, wanting to be seen holding the winners whenever they report their figures. And that can open opportunities for long-term private investors.

Second half

Still, if the first half for abrdn was tough, the second half could even be tougher. Inflation in August was a bit less painful than we’d feared — the 9.9% reported this week was better than forecasts suggesting 10.2%. But the Bank of England reckons recession is unavoidable.

The only real question is how long the economic downturn might last. Oh, and how much more money investors might withdraw from asset managers like abrdn. And what effect that could have on share prices over the next 12 months.

Thinking on that final question, I suspect the bad news might already be factored into the abrdn share price.

At the first-half stage, abrdn maintained its interim dividend at 7.3p per share. That’s in line with last year. And if it’s repeated for the second half, we’d be looking at a dividend yield of 10% on the current abrdn share price.

Long term

That’s by no means certain, and I think a second-half dividend cut is a realistic possibility, depending on the cash situation in the half. But even if there’s no final dividend at all (which I think unlikely), shareholders would still have pocketed 5% this year. And that’s not bad.

We may have a tough time ahead. The company itself said: “Current market uncertainty means our ambitions for revenue growth and improved cost/income ratio are likely to take longer than originally expected“.

But I invest for the long term. And abrdn is firmly on my list of options for my next investment.

It looks like it’s picked up a bit from a recent bottom. But shares do that, and it’s probably as likely to head further down again.

I’m not interested in bottoms anyway, or trying to time my investments. And there’s a key thing that I think makes me a contrarian — I don’t care what current conditions look like or what the market thinks about them.

Not retiring yet

Why would I care if I’m not planning to retire for many years yet? When I do come to retire, it simply won’t matter what share prices looked like a decade previously.

Just because abrdn shares have fallen, though, doesn’t mean they’re necessarily a bargain now. And I do see some good reasons for the decline.

Investing shift

A lot of investors have been shifting their wealth to things they see as safer these days, and away from stock market crash risk. That means investment managers are finding it harder to retain clients, and are suffering outflows of funds.

In addition, when shares are performing poorly, managers like abrdn suffer a different way too. Some of the fees they charge are performance-based. And, well, when performance is poor, so are the fees.

Long term

Investment managers tend to rise and fall along with market performance, but often with a little more volatility. And in the current climate, I don’t expect to see good performance in the next year or so.

But I have a long-term horizon, and I’m not investing for this year, next year, or any time soon. I think the stock market will outperform other investments in the long run. And it follows that I expect investment managers to profit from that.

Dividend yield

Oh, and did I mention the dividend yield? Current forecasts have it at a whopping 9.7%. And if dividends like that won’t help boost my retirement income, I don’t know what will.

Of course, if current conditions go on for too long, abrdn’s income could suffer, and that dividend might well fall. If that happens, investors might sell off some more and drop the share price even further.

Future dividends

But I’m not really worried about this year’s dividend, or next year’s. No, I’m thinking about long-term dividends.

So what I’m really looking at is buying into all those future dividends, but at today’s low share price. If I do that, I hope to lock in better effective long-term yields than if I wait until the share price recovers.

So will I buy abrdn shares? Well, I’m also looking at M&G, which is in a very similar position. But if abrdn still looks this good when I have my next investment cash saved up, I think I will buy.

Long-term prospects from dividend shares

The sort of dividend shares I like to own in my portfolio are ones that offer me good income prospects not only now but also in the future.

At the moment there is a looming risk of an economic downturn. That could hurt income at some companies, reducing or eliminating altogether their ability to pay dividends. After all, dividends are never guaranteed.

So I am looking for companies I hope can perform well in coming years. The two shares do both face risks from a worsening economy if it leads customers to withdraw funds from their services. That could hurt profits. But with a generous yield north of 9% in each case, I am happy to take that risk as I think it is already reflected in the share prices.

Asset managers

The two shares in question are M&G (LSE: MNG) and abrdn (LSE: ABDN). Both are asset managers. Both have a juicy dividend yield: 9.3% at M&G and 9.9% at Abrdn. So if I invested £10,000 evenly across the duo today, I would be eyeing annual income from these two dividend shares close to four figures.

I think the bull case for both is similar. They benefit from strong brands that can help them attract customers (despite abrdn’s silly corporate name, it also owns the Interactive Investor operation). They both have long experience and deep expertise when it comes to investing. That can help them in running their businesses and attracting new clients.

Attracting and retaining clients is a key challenge right now in the asset management industry. At the half-year point, M&G saw net client inflows of funds (outside its Heritage business). M&G saw net outflows of about 1% of assets under management. Compared to the picture at rivals like Jupiter, I see this performance as decent.

Both M&G and abrdn have a policy of aiming to maintain their dividend – M&G even wants to raise it if it can. But there is a risk that market turbulence hitting profits could hurt dividend cover. abrdn, for example, held its interim dividend flat, but the cover on an adjusted capital generation basis fell to 0.7 times in the first half. That is not sustainable in the long term, so I am hoping that it will focus on stemming outflows like M&G has been doing. After falling out of the FTSE 100 last month, I feel Abrdn has work to do on reassuring shareholders that it plans to return to growth mode.

Why I own these shares

Despite the risks, I think both businesses have good long-term prospects. Meanwhile, if they can deliver on their policies and keep the dividends flowing at their current level, I will be handsomely rewarded as a shareholder.

For that reason, I plan to keep holding both of these dividend shares in my portfolio and would consider buying more.

Is this a dividend stock I should buy for my portfolio? Let’s take a look.

Should I buy Abrdn shares?

So the first thing I want to look at here is whether this is a high-quality business. These businesses tend to produce strong total returns (capital gains and dividends) for their investors over the long run. Low-quality businesses, by contrast, often experience share price losses and dividend cuts.

When it comes to the quality on offer here, I do have a couple of concerns. The first is in relation to the company’s market position and branding.

The asset management industry is highly competitive and I’m not convinced that Abrdn has a genuine edge. When I think of industry leaders, names such as BlackRock (iShares), Vanguard, and Fidelity come to mind. I don’t think of Abrdn. Meanwhile, the company’s recent name change – designed to appeal to younger investors – has attracted a lot of criticism.

My other concern is in relation to the company’s product performance. My research tells me that it hasn’t been very good lately. In 2021, for example, only 57% of Abrdn funds outperformed their benchmarks. By contrast, at Schroders, 74% of assets outperformed their benchmarks. For the five-year period to the end of 2021, the figure for Abrdn was 67%, which is a little better.

However, once again, this was well below Schroders’ performance, where 78% of assets beat their benchmarks. This poor performance could lead investors to move their money to other asset managers.

Given these issues on the quality front, there’s a chance the stock may not deliver good returns over the long term.

Is the dividend sustainable?

Zooming in on the dividend, I also have some concerns. My issue here is that dividend coverage – an indicator of dividend sustainability which is calculated by dividing earnings by dividends – is very low. For 2022, the projected ratio is just 0.67. This tells me that earnings are not set to cover the estimated dividend payout. In other words, the dividend could be at risk of a cut. If the dividend was to be cut, it could result in share price losses.

It’s worth pointing out that very high yields, such as the 9.8% on offer here, can be a signal that the market doesn’t believe the dividend is sustainable. Often when a company has a super high yield, it’s because the ‘smart money’ has already dumped the stock. This has pushed the share price down and the yield up temporarily.

My move now

Now there are some things to like here, of course. For example, the company is shifting its focus to real assets and alternatives, which are both seeing high demand from investors right now. It also announced a £300m share buyback recently. This could help boost earnings per share.

However, I don’t see enough appeal in the stock to buy it for my portfolio. All things considered, I think there are much better dividend stocks I could buy today.