The share price of FTSE 100 asset manager Standard Life Aberdeen (LSE: SLA) has risen by more than 10% from the all-time lows seen earlier this year.
Today I’m asking whether it’s time to start buying this unloved stock, which offers a dividend yield of more than 8%.
I’ll also be taking a look at a smaller financial stock with a unique UK presence and a 7.8% dividend yield.
Standard Life Aberdeen’s performance in 2018 didn’t do much to reassure nervous investors. Pre-tax profit fell from £660m to £650m, while assets under management dropped from £608.1m to £551.5m.
Happily for shareholders, the dividend was left almost unchanged at 21.3p per share, a level that management plans to maintain until the business returns to growth.
It’s all a bit of a worry, especially as the logic behind combining these two businesses was to benefit from economies of scale. However, I believe things may not be as bad as they seem.
Returning to growth?
For a mature business, growth often comes from cost-cutting as well as outright growth. In this case, a cost-cutting approach makes sense — both Standard Life and Aberdeen were big businesses in their own right when they merged.
The merger deal targeted £350m of cost savings, and so far £175m of these have been identified. According to the results, the company also delivered an extra £56m of savings last year in addition to this.
I’m confident that management will deliver in terms of cost-cutting. But to really reward shareholders, the company will need to deliver some underlying growth.
My view is big asset managers like SLA will remain relevant, despite changes to the fund management market. I expect growth to return gradually, after the shake-out that’s resulted from the two groups combining their offerings.
In the meantime, the group’s cash generation from fees is supported by cash from the gradual exit of the group’s insurance businesses. Although a dividend cut can’t be ruled out, I think Standard Aberdeen probably offers good value as an income buy at current levels.
Why I own this stock
One high yielder I own myself is mid-cap firm PayPoint (LSE: PAY). This company operates a network of bill payment terminals and point of sale systems that covers about 28,000 convenience stores, garage forecourts and newsagents across the UK.
The firm’s roots are in allowing customers to pay household bills in cash. But as this need declines, PayPoint is gradually transforming itself to become a financial hub for convenience retailers. Its latest system offers services such as card processing, stock management and the Collect+ parcel drop-off network.
For investors, this business poses a dilemma. On the one hand, it’s very profitable and generates a lot of spare cash. On the other hand, growth has been limited in recent years.
New boss Patrick Headon believes that the group’s extensive network — which is larger than the Post Office, supermarkets and banks — will support long-term growth. I can see the potential.
With the shares offering a forecast yield of 7.8%, I’m happy to hold, although I’d be looking for a dip below 1,000p to justify further buying.
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