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abrdn - buyback announced

abrdn has announced a new £300m share buyback programme...

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abrdn has announced a new £300m share buyback programme. The first phase of up to £150m will begin immediately, with the purchase of shares ending no later than 30 December 2022.

The shares fell 3.4% following the announcement.

View the latest abrdn share price and how to deal

Our View

abrdn's new share buyback was expected following the disposal of Phoenix. And looking at the group's valuation it's not the worst time to be repurchasing shares.

However, there's a reason for the downward pressure on the market's assessment of the banking and asset management sectors. Huge political uncertainty and wider economic rumblings mean European fund flows have been negative for a while. And the Ukraine crisis is likely to result in ups and downs over the medium term.

But there are abrdn specific issues. abrdn hasn't proven a terribly popular option for investors. Assets have been walking out the door for years, with positive market movements making up for net outflows this year. But ultimately the group needs to encourage more investors that its funds are the place to leave their money. Given its Environmental, Social and Governance (ESG) options currently lag peers, and demand for ESG investments is on the rise, this may be a difficult task.

Together with the incredibly challenging market conditions this means abrdn has turned to acquisitions to help keep revenue moving in the right direction. abrdn now owns Interactive Investor (ii), which is one of the UK's biggest direct-to-consumer investment platforms.

This fits with abrdn's strategy to build scale and improve its own direct-to-consumer offering. Taking on an established platform is, in theory, a sensible and faster way to do this. As ever with any large-scale takeovers, there will be a reasonable amount of execution risk. Integrating a company of that size doesn't come without its pitfalls.

The group's ability to fund the deal highlights a core benefit of abrdn. Asset management is a capital light business, meaning profits are free to be funnelled where they're needed.

We should also mention that the majority of the funds abrdn manages have been able to deliver investment returns ahead of their benchmark - a key requirement if investors are to be tempted back. Offering funds across all the major investment categories means the group can cater to whatever happens to be flavour of the month with investors.

A better proposition is also supported by ongoing cost savings, allowing pricing to remain competitive. This ultimately benefits 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. That's where II slots in nicely.

We also have no financial concerns about abrdn - but investors should be aware the dividend is currently not covered by profits. Instead, shareholder returns are being paid for by reserves, which is not a sustainable solution. The buyback will make the dividend slightly less of a burden, because there will be fewer shares to pay dividends on. But being frank, we'd have preferred the Phoenix proceeds to be channelled elsewhere.

The about-turn in revenues can't come soon enough for abrdn. A strong investment performance, bolstered direct-to-consumer offering and improved proposition are all excellent developments. But we'd like to see abrdn generating meaningful inflows and more progress on costs before saying the coast is clear.

abrdn key facts

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 (profit figures are underlying)

abrdn, formerly Standard Life Aberdeen, reported full year fee-based revenues of £1.5bn, up from £1.4bn last year. Assets under management and administration (AUMA) rose 1.3% to £542m, as positive market movements offset a net outflow of £6.2m. Underlying operating profits rose 47.5% to £323m.

The £1.49bn acquisition of subscription-based investment platform, interactive investor, is expected to complete by the middle of the new financial year. The deal is subject to shareholder and regulatory approvals.

A final dividend of 7.3p was announced, taking the full year payment to 14.6p per share, in-line with last year.

Looking ahead, the group said "The current conflict between Russia and Ukraine is already impacting markets and operations and is likely to have substantial economic consequences".

Excluding flows relating to the highly volatile liquidity segment and exit from Lloyds Banking Group, net outflows were £3.2bn, down from £12.3bn.

Underlying operating expenses of £1.2bn were down slightly on last year, and the group had a cost:income ratio of 79%, down from 85%. The group said this is "not yet where it needs to be, but showing progress in Asia, the Americas and EMEA".

abrdn's Investments business - the largest segment- reported fees of £1.2bn, up 4.7%. This was helped by "favourable" market levels, and a £16m increase in performance fees to £46m. Operating profit was £253m compared to £186m, thanks to the higher revenue and a 1% reduction in costs. Assets under management rose 1.5% to £464m. 57% of AUM outperformed its benchmark, rising to 67% on a three- and five-year basis.

The group's working on simplifying its operations and increasing efficiency through increased automation.

The Advisory business reported fees of £178m, up from £137m as assets under administration (AUA) rose £9m to £76bn and higher net inflows of £3.9bn, partly reflecting higher market levels. There was also a £25m benefit from the simplification of abrdn's strategic partnership with Phoenix. Operating profit rose from £48m to £74m.

Personal reported fee revenues of £92m, up 15%. That fed into operating profits of £8m compared to a £5m loss a year ago. AUMA rose £1bn to £14bn. This division is where Interactive Investor would sit, should the deal go ahead.

The group has delivered on its target of achieving £400m in annual synergies by the end of 2021. The group reported a small free cash inflow of £2m. There were cash and cash equivalents of £1.9bn as at the end of December.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 6th July 2022