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Standard Life Aberdeen - dividend cut after tough year

Sophie Lund-Yates, Equity Analyst | 9 March 2021 | A A A
Standard Life Aberdeen - dividend cut after tough year

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Standard Life Aberdeen Plc Ordinary 13 61/6

Sell: 265.60 | Buy: 265.90 | Change -10.30 (-3.73%)
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Standard Life Aberdeen (SLA) reported full year fee based revenue of £1.4bn, down 13% year-on-year. That reflects asset withdrawals and changes in asset mix. That resulted in underlying profit before tax falling 17% to £487m.

SLA has cut its full year dividend payment to 7.3p per share, bringing the full year payment to 14.6p per share, down from 21.6p last year. The board intends to maintain the dividend at this level until adjusted capital generation is 1.5 times the dividend payment. This year capital generation was 0.8 times the dividend.

The shares fell 3.9% following the announcement.

View the latest Standard life Aberdeen share price and how to deal

Our View

Having sold off most of its insurance businesses SLA is, first and foremost, an asset manager.

We can see the reasons for the switch. Asset management is less capital intensive than life insurance, freeing up cash to fund shareholder returns. A product range that embraces most of the major asset classes should reduce the group's exposure to investment fashions too.

The problem is that, so far at least, SLA hasn't proven a terribly popular option for investors. Over 10% of assets walked out the door in 2019, and while most of that was down to the end of the Lloyds relationship, a sizeable chunk wasn't. To make matters worse clients are choosing more Cash/Liquidity products instead of the more lucrative equity and multi-asset funds, and that's depressing margins.

The fact SLA's struggled to hold onto funds isn't altogether a surprise. Until recently 69% of the group's equity funds had underperformed their benchmarks over five years. That makes the funds a tough sell. Passive alternatives are not only cheaper, in recent years they would have performed better too.

However, there are some early signs of progress. The group's funds have weathered the current crisis rather well and that's helped performance. Now 66% of the group's funds are beating their benchmarks, which should help attract assets going forward. The ship may have steadied when it comes to outflows too. Excluding Lloyds, net outflows were a little over half a percent last year. That doesn't mean the hard work's over, but it's a step in the right direction.

The merger between Standard Life and Aberdeen Asset Management continues to drive cost savings. Together with other efficiencies that's allowed the group take steps to make pricing more competitive. Lower pricing will ultimately benefit the advisory platforms which are already gathering assets nicely. In the long run we think retail investors probably provide a relatively stable source of assets for the group.

With several billion pounds from life insurance sales in the bank, plus the release capital previously restricted by regulatory requirements, the group's got plenty of cash on hand. However, SLA is using the cover provided by the pandemic to cut the dividend, and we think the payout is unlikely to grow in the near term as it prioritises capital generation.

A better investment performance, good retail distribution platforms and lower operating costs give SLA all the tools it needs to make the most of its situation. However, the group still faces the rise of passive investment alternatives and the associated pricing pressure. We'd like to see SLA generating meaningful inflows and more progress on costs before turning more positive, especially when the valuation is this far above its long run average.

Standard Life Aberdeen key facts

  • Price/Earnings ratio: 17.5
  • 10 year average Price/Earnings ratio: 11.6
  • Prospective yield: 4.8%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results

Total assets under management or administration fell from £544.6m at the end of 2019 to £534.6m. That reflects total net outflows of £29.0bn, but most of that was down to a single large withdrawal from Lloyds Bank. Excluding that, the net outflow was £3.1bn, as insurance outflows were only partially offset elsewhere.

Fee based revenue from the Investments division fell 10% to £922m, mainly reflecting outflows in 2019 and clients opting for less lucrative product categories like Cash/Liquidity. The Insurance division, which looks after assets for Phoenix and Lloyds (among others) recorded a 29% fall in fee based revenue, mostly because of the Lloyds withdrawals. Advisor revenue fell from £150m to £137m thanks mainly to price cuts, and Personal revenue rose from £70m to £80m.

Investment performance improved year-on-year with 66% of assets under management (AUM) delivering an above benchmark return over 3 years. That reflects improvements in performance in equities and consistency elsewhere.

Adjusted operating expenses fell 10% year-on-year to £1.2bn, reflecting falls in both staff and non-staff costs. However, the reduced revenue and high proportion of fixed cost meant SLA's cost:income ratio still rose from 82% to 85%. Management described this as "too high" and intends to reduce the ratio to 70% by the end of 2023.

So far management's transformation efforts have reduced annual operating costs by an estimated £287m, and is on track to generate £400m in savings by the end of 2021. So far, these actions have cost £515m of an expected £555m.

SLA reduced its holdings in HDFC Asset Management from 26.9% to 21.2%, which was the main contributor to a 23% fall in adjusted profit to £44m from asset management associates and joint ventures.

Insurance associates and joint ventures generated £203m in adjusted profit, up from £189m last year. The bulk of this comes from Phoenix and, after the acquisition of ReAssure, SLA owns 14.4% of the group.

The group's regulatory capital surplus increased to £2.3bn, from £1.7bn during the year. This primarily reflects the contribution of HDFC Life and HDFC Asset Management sale proceeds, as well as organic capital generation. The group intends to monetise the rest of the HDFC Life holding in the next two years.

Find out more about Standard Life Aberdeen shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.