As an investor with an appetite for dividends, when I own a share with a juicy yield it makes me happy. So the fact that I own a well-known FTSE 250 share with a monster dividend yield of 17% might sound like cause for celebration.
Often though, a yield that high is a red flag that a dividend cut might be on its way. So, is this share one worth holding in my portfolio?
Self-made problems
The share in question is Jupiter (LSE: JUP).
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It has been a tough time for asset managers and a lot of rivals have seen their shares fall. Abrdn, for example, has seen its shares plummet 44% over the past year. But I think Jupiter is suffering from some bad choices of its own making, not just the general problems currently facing many asset managers.
An example is Jupiter’s close involvement with investment trust Chrysalis. The latter’s shares have fallen 72% in the past year. Its exposure to unquoted companies has brought its valuations under scrutiny. That seems to have been a distraction for Jupiter and has helped to drag its share price down 62% in the past year.
As the Jupiter share price has fallen, its dividend yield has moved up. It now offers the biggest yield of any company in either the FTSE 250 or FTSE 100!
Trouble at t’mill
My concern, though, is that the dividend may be cut.
At the interim level, Jupiter maintained its payout at the same level as last year. But business performance was alarming. Compared to the same period last year, net management fees fell 11% and statutory profit before tax crashed 68%. Over the six months, assets under management fell by 19%. Partly that reflects market returns that are affecting many asset managers. But it also came about because Jupiter saw net cash outflows of £3.6bn across the period.
It means that Jupiter fundholders are pulling about £140m a week more from its funds than they are putting into them. The company’s fall in earnings in the first half already alarmed me. But if the net outflow of client funds continues, I think earnings could slide even further. The 7.9p per share interim dividend was nowhere near being covered by basic earnings per share for the six months of 2.6p.
If Jupiter cannot turn its business performance around quickly I think it will likely have to cut its dividend in future.
FTSE 250 high yielder
Despite that, I continue to be attracted to the company and hold it in my portfolio.
The mammoth current yield means that even after a dividend cut, Jupiter could be an attractive income pick compared to many other FTSE shares. Although its business has stumbled, it retains key assets, such as a well-known brand. It needs to figure out how to get more investors putting money into its funds. It has been able to do that in the past, which gives me some confidence it can do it again in future.
The battered share price reflects many investors’ deep worries about what happens next at Jupiter. I recognise the risks involved, but continue to see an investment case for the fund manager. I think the share is worth me still owning, although I am increasingly expecting a dividend cut.
