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When it comes to high dividend yields, few FTSE stocks come close to beating Ashmore Group’s (LSE:ASHM) current 9.5% payout. This yield’s largely been driven by management maintaining dividends despite its share price tumbling by more than 50% over the last five years.
So if dividends are seemingly here to stay, is this secretly a lucrative opportunity for income investors?
The bull case
Ashmore’s share price weakness since 2020 has been driven predominantly by poor returns within emerging markets. As an investment specialist in this field, performance has suffered greatly as economically weaker countries struggled to handle both the impact of the pandemic and the subsequent macroeconomic headwinds that followed.
Consequently, clients started withdrawing their capital, resulting in significant profit and revenue pressure on the business. However, emerging markets have since started rebounding quite significantly. In fact, the MSCI Emerging Market Index is up over 17% in the last 12 months.
A weaker US dollar has been quite handy in helping emerging economies get back on their feet. And with businesses reporting recovering growth and earnings, these international stocks have followed suit.
This has translated into the outflow of Ashmore’s assets under management (AUM) to slow and stabilise. While profits are still significantly below 2021 levels, the firm’s cash flow generation remains strong. Hence why management’s been able to maintain dividends in spite of all the headwinds. And if emerging markets continue to outperform, Ashmore should have little trouble attracting investors back into the fold.
What could go wrong?
Even with improving external market conditions, there are still some notable risks that might jeopardise today’s impressive dividend yield. Rising geopolitical tensions and conflict escalations could derail the recovery progress made in certain key emerging markets. And even if Ashmore successfully avoids these regions, weak sentiment from risk-adverse investors could still prevent the businesses from delivering strong returns.
This scenario is particularly concerning given management is paying out more in dividends than it’s actually generating from operations. In the long run, this is unsustainable, likely leading to a dividend cut if AUM and subsequently cash flows don’t improve in the short term.
Management does have a bit of wiggle room here with around £308m in cash & equivalents on the balance sheet and negligible levels of debts & equivalents. But the general consensus among institutional investors is that unless earnings can recover significantly within the next 18 months, a dividend cut could be unavoidable.
The bottom line
Ashmore’s cyclical downturn appears to have finally reached the bottom with early signs of a recovery starting to kick off. However, there’s still a lot of uncertainty regarding how long the recovery will take. And with more money flowing out of the business than coming in, the clock’s ticking before management may be forced to cut shareholder payouts.
Put simply, this is a very high-risk, high-reward income opportunity in 2025. But, with the business largely dependent on emerging market momentum – something outside of its control – this isn’t a risk I’m willing to take.
As such, investors may want to consider exploring other high-dividend yield stocks for their portfolios.
