UK Edition
Questor enjoys nothing more than unearthing a stock whose price has fallen heavily and therefore offers the prospect of long-term recovery. Indeed, such opportunities provide scope for sensational returns that can easily vanquish the wider stock market’s performance.
However, investment company Abrdn fails to offer such potential after falling by 50pc since this column advised readers to “avoid” it just over a year ago. Since then, it has underperformed the FTSE 100 index by 56 percentage points. Worse still, its recent half-year results show it is making little progress in delivering an improved financial performance.
For example, assets under management declined by £34bn (6pc) in the first six months of the year. This was due to net outflows of £36bn, which included a £24bn withdrawal by Lloyds Banking Group, as well as £52bn in negative market movements caused by declining global equity markets. Indeed, were it not for the addition of £55bn in assets resulting from the acquisition of investment platform Interactive Investor, Abrdn’s assets under management would have dropped by £88bn (16pc) over the past six months.
The company’s declining assets under management naturally prompted a fall in profitability. Adjusted operating profit slumped 28pc in spite of a 2pc reduction in adjusted operating expenses. With an 83pc cost:income ratio, which was four percentage points higher than a year ago, the company’s efficiency is heading in the wrong direction.
This has contributed to a more fragile outlook for the company’s dividend. Although its yield now stands at a relatively high 10pc following the share price fall, dividend cover on an adjusted capital generation basis of 0.7 times, versus 1.14 times a year ago, suggests shareholder payouts are becoming less affordable. And since the company does not plan to raise dividends until cover reaches 1.5 times, income investors should not be seduced by an exceptional yield that fails to grow in an era of high inflation.
With global active fund outflows at their highest level since the credit crunch, the near-term outlook is challenging. An uncertain economic outlook that prompts a “risk-off” attitude, combined with the shift from active to passive funds, may lead to further pain for its investors.
While an adjusted price-to-earnings ratio of 11 highlights that the shares are cheap, there are far better opportunities with greater recovery potential available elsewhere. Avoid.
Questor says: avoid
Ticker: ABDN
Share price at close: 147.05p
Update: BHP
Since reaching a high of more than £30 in April, shares in BHP have slumped due in part to an increasingly downbeat global economic outlook. The mining behemoth now trades only 5pc higher than at the time of our initial “buy” recommendation in January.
While the company faces a more challenging near-term industry outlook than at the start of the year, its long-term potential remains compelling. Demand for the future-facing commodities on which it now focuses, including iron ore, copper, and nickel, is likely to rise as net zero policies prompt greater investment in, and usage of, renewable energy infrastructure and electric vehicles.
Since our “buy” recommendation, the company has merged its petroleum business with Woodside. Shareholders have received one Woodside share for every 5.534 BHP shares they held on May 26. In Questor’s view, there are superior investment opportunities available elsewhere in the energy sector. Therefore, we advise readers to sell their shareholding in Woodside.
BHP’s profit rose by 34pc in the 2022 financial year. This allowed it to cut net debt by 92pc to a negligible amount and raise dividends to an all-time high. As a result, it now yields 11pc.
Clearly, BHP’s dividend is far less stable than the shareholder payouts of most FTSE 100 companies due to the cyclical nature of its business. But its high yield and low price-to-earnings ratio of 7 suggest that investors have priced in a likely global slowdown.
With an auspicious long-term outlook and the means to ride out short-term challenges, Questor views the stock’s current price level as an attractive buying opportunity.
Questor says: buy
Ticker: BHP
Share price at close: £25.07
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