Are these 6.8% yielding UK shares a value trap?

Risk reward ratio / risk management concept

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I continue to look for bargain shares I can add to my portfolio. At the moment I own some UK shares in a well-known fund manager. They have soared over 60% since their October lows, but still yield an impressive 6.8%. On top of that, despite the recent share price surge, I can still purchase them for 7% less than I would have paid one year ago.

What I am trying to decide is whether the stock in question is a bargain I should stock up on – or a possible value trap.

Well-known fund manager

The company in question is Abrdn (LSE: ABDN).

Despite its silly name, it is a serious company with a well-established business. Last year it made close to £1bn in post-tax profits. That gives it an attractive net profit margin. Last year’s revenues were £1.7bn, so the net margin was an impressive 59%. With the market capitalisation currently standing at £4.3bn, the price-to-earnings ratio works out to be under five. That certainly looks cheap to me.

But when a share has a juicy yield and a low-looking valuation, it can be a red flag for me as an investor. Is that true when it comes to these UK shares?

Challenging times

Certainly, Abrdn has had its share of difficulties.

Fund managers in general have been out of favour with investors. Rival Jupiter has seen its share price plummet 36% over the past year, while Schroders is down 22% in that period. That reflects investor nervousness that volatile stock markets and tightening household budgets could put people off investing in funds, hurting sales and profits for firms like Abrdn.

I do see that as an ongoing risk. On top of that, Abrdn has form in cutting its dividend. In 2020, the annual payout was reduced by nearly a third. It has been flat since then. So, while the dividend yield is attractive, it is not growing and if business gets worse, a cut could be on the cards.

Business potential

Looked at like that, Abrdn could yet turn out to be a value trap – particularly if its business performance disappoints.

However, I also think it might be a bargain for my portfolio, even after its strong share price rally. The company has a well-established place in the asset management industry and deep experience. That can help it attract clients and also navigate any choppiness in the markets.

The business model looks highly profitable in general, as shown by those juicy margins I mentioned above. At the interim stage this year, though, the pre-tax profit was replaced by a substantial loss of £320m, while revenues fell 8% compared to the prior year period.

My move

I do think Abrdn has the makings of a solid business and like its yield. So I will continue to hold the shares I own. But there are clearly risks and performance in the first half of the year gave limited grounds for confidence about the current business trend for the asset manager.

So, although I do not see it as a value trap, I will not add any more Abrdn to my portfolio of UK shares at the moment.

#yielding #shares #trap

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