Forget the Standard Life Aberdeen share price, I’d buy this FTSE 100 8% yielder

asset manager Standard Life Aberdeen (LSE: LON:) has been a disappointing investment over the last couple of years.

Since Standard Life merged with Aberdeen Asset Management in 2017, shares in the combined firm have lost about 50% of their value. A generous dividend is some compensation, but how safe is this payout?

I’ve been taking a look at the firm’s latest results to find out more.

“Building blocks in place”
The company says that it’s now 75% of the way through its transformation plan, leaving it ahead of schedule. Chief executive Keith Skeoch believes that a growing focus on direct relationships with retail customers and new areas of active investment like real estate and private equity will produce long-term results.

However, the firm’s performance does not yet show any signs of improvement. Outflows from the group’s funds increased in 2018. Assets under administration fell from £608.1bn to £551.5bn during the year.

Pre-tax profit from continuing operations fell from £660m to £650m. As a result, the 21.6p dividend was not covered by adjusted earnings from continuing operations of 17.8p per share.

Is the dividend safe?
Mr Skeoch says that the plan is to hold the dividend at the 2018 level of 21.6p per share until “future financial performance confirms the sustainability” of the payout. But what if this doesn’t happen?

There are a couple of ways that Standard Life Aberdeen can raise cash. Share buybacks are currently reducing the share count, which lowers the total cost of the dividend. And the company expects to generate about £380m from the sale of a further 4.9% stake in its Indian life insurance business, HDFC.

SLA’s remaining stake in HDFC is said to be worth about £2.1bn, so this holding could be tapped for more cash if needed. The problem with this is that the group may be giving up a long-term growth asset to fund short-term needs.

I think the dividend looks less secure than it did a year ago. I’m not sure how quickly this business will return to growth. Analysts’ forecasts suggest at least one more year of falling earnings.

On balance, I think the stock is priced fairly at current levels, with a 2019 forecast P/E of 11 and an 8.6% dividend yield. I’d rate the shares as a hold, for now.

This is what I’d choose
One financial stock I’ve added to my own portfolio is home and motor insurer Direct Line Insurance Group (LSE: DLG). This well-known firm needs no introduction, but I think its strong brand and direct selling model should support continued growth.

Recent results from Direct Line suggest that even in a very competitive market, the firm is gaining market share. The number of policies written under its own brands rose by 3.2% to 7,132,000. Premium income from its own brands rose by 1.8% to 2,223m.

Increased claims losses last year meant that the group’s return on tangible equity — a measure of profitability — fell from 23% to 21.5%. But this is still a strong result that supports good cash generation for dividends.

The firm will pay a total dividend of 29.3p per share for 2018, including a special dividend of 8.3p. Analysts expect a similar payout in 2019, giving the shares a forecast yield of about 8%. In my view this remains an attractive business at a good valuation. I rate Direct Line as a buy.

Roland Head owns shares of Direct Line Insurance. The Motley Fool UK has recommended Standard Life Aberdeen. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019