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The share price of sustainable investment firm Impax Asset Management (LSE: IPX) has taken a big hit recently. As a result, the stock now sports a dividend yield of around 20%.
Is this an amazing opportunity for income hunters? Or are we looking at a classic ‘yield trap’? Let’s discuss.
Ex-super stock
A few years ago, I was quite bullish on Impax shares.
At the time, interest in sustainable investment strategies was booming and this niche asset manager was having a lot of success.
Its share price was flying too. Back in late 2021, the stock was trading near 1,500p versus 137p today.
The landscape has changed
Today however, I’m not as excited about the stock.
Recently, interest in sustainable investing has cooled quite significantly (defence stocks and tobacco shares are flying right now).
Meanwhile, the company is experiencing some challenges.
For example, late last year, wealth manager St. James’s Place terminated Impax’s Sustainable & Responsible Equity Fund mandate. This was a £5bn+ fund and Impax said that the termination will result in a £12.7m annual hit to its revenue.
There’s also the global shift to passive (index) investment strategies. This is a major trend and it’s not good for active managers like Impax.
Looking cheap now
That said, there are still a few reasons to be bullish here.
After the recent share price fall, the stock does look cheap. Currently, the price-to-earnings ratio (P/E) is only six (if we assume the current earnings forecast is accurate).
Given the low valuation, the company could potentially be a takeover target. I expect to see plenty of M&A in this industry in the years ahead, given the challenges companies are facing due to the rise of index investing.
High dividend yield
Zooming in on the dividend, the payout last financial year (ended 30 September 2024) was 27.6p per share. So, at the current share price of 137p, we have a yield of 20.2%.
Now, when a yield is that high, it’s almost always a signal that a dividend cut is on the way.
And I think that’s likely here.
This financial year, earnings per share are only projected to be 22p (they might be lower than this as analysts’ forecasts are falling rapidly). So, earnings won’t cover another payout of 27.6p.
That puts the dividend coverage ratio at 0.8. A ratio under one typically signals that a payout is unsustainable.
However, even after a big cut the yield could still be attractive.
For example, let’s say that Impax reduced the payout to just 10p per share (a 64% cut). That would still represent a yield of 7.3% today.
My view on Impax
So, is this stock worth considering? Well that’s hard to say.
If someone likes to invest in beaten-up value stocks that are higher up on the risk spectrum, the stock could potentially be worth considering at today’s price level.
However, for anyone who prefers to invest in safer dividend stocks, I think there are better shares to consider buying today.
