Asset manager abrdn’s (LSE:ABDN) share price has toppled 20% in 2022. Based on current dividend forecasts this means abrdn shares carry a 7.4% dividend yield for the next two years.
This is double the forward average of 3.7% for all FTSE 100 shares. But just how robust do current dividend forecasts look? And should I invest in the business to improve my passive income?
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Dividends to fall again?
Unfortunately, abrdn hasn’t been a star performer when it comes to dividends in recent years. It slashed full-year payouts in the years leading up to the pandemic. And it cut them again following the onset of Covid-19.
Dividends were frozen in 2021 at 14.6p per share. But City analysts are expecting additional reductions over the medium term. In fact, City brokers have been downgrading their dividend forecasts for abrdn shares in recent months.
They now predict payments of 14.2p and 14.1p per share in 2022 and 2023 respectively.
Weak coverage
The good news is that these estimates produce those whopping yields. The bad news is that predicted earnings are so weak that actual dividends may come in considerably lower than forecast.
Earnings per share at abrdn is tipped at 8.9p for this year and 9.8p for 2023. Both fall well short of the those same brokers’ dividend estimates.
When I buy income shares I look for anticipated dividends to be covered at least 2 times by estimated earnings. This gives a wide margin of safety.
More asset sales
Encouragingly though, abrdn continues to sell assets to boost its balance sheet. This could theoretically still give it the means to pay the big dividends that analysts are expecting.
Last week, it was announced abrdn will sell its entire 10.21% stake in India’s HDFC Asset Management. The business raised £262m over the summer by selling some shares in HDFC Life Insurance too. And further capital-boosting divestments could be around the corner.
Poor performance
However, the deteriorating trading outlook still puts dividends in the short-to-medium periods in significant danger. In fact, I think brokers could continue downgrading their payout forecasts.
The asset manager’s profits are hugely dependent on the performance of stock markets. And there are big threats to equity markets in 2023 as central banks raise interest rates, the Covid-19 crisis in China continues, and war in Ukraine drags on.
I’m also worried by abrdn’s worsening record of investment returns. In the first half of 2022, just 63% of its assets under management beat benchmarks on a three-year basis. This was also down from a reading of 67% printed last year.
On the plus side, abrdn is expanding in new areas like retail investment platforms. This could give profits a considerable boost in the near term and beyond.
Still, it’s my opinion that there are much better stocks for me to buy for passive income today. So I’m happy to avoid abrdn shares, despite its huge dividend yields.
