Stockwatch: Lock in this 7% yield

Extraordinary volatility in recent days may be perplexing, but it asserts an ongoing truth about the financial environment: that central banks continue to backstop markets, and excess liquidity means an ever-rabid chase for yield. Shocks reverberate, but are instantly snatched. As I have broadly intoned in macro comment pieces, "keep buying the dips". Certainly you need to be aware of recessionary risks, and stock selection is vital, but overall it's a boon for those managing their own finances.

A stock to capitalise, and also take advantage of a sharp fall in mid-cap shares, is Jupiter Asset Management. It isn't down massively like banks or insurance stocks - at about 350p it has fallen 23% from peaks around 445p in the last two years - and if consensus forecasts are fair it now trades on a 12-month forward price/earnings (PE) ratio of 11.5, yielding just over 7%.

The Company REFS table overlooks special dividends that have boosted total dividends to about 25p in the last two years, but usefully cites a strong record of cash flow versus zilch capital spending needs - cash generation that matches or exceeds earnings per share (EPS). This reflects a well-run business with attractive economics for shareholder distributions - i.e. the kind of stock to buy when sentiment runs against it.

Entrepreneurial culture in mutual funds

Jupiter was founded in 1985 by the quirky John Duffield: an early pioneer of "green" investment funds, also Asia and emerging European economies. Culturally, there was a parallel with Gartmore Asset Management in its 1980s go-go years, which has appealed to progressive fund managers. Success in this industry is largely about attracting and retaining the best talent, with freedom to excel.

As money men, however, they can also be driven by capital rewards: e.g. selling the business to Commerzbank by 2000, with whom Duffield then fell out and left. There was then a rather torturous process to resume listed status: a buyout in 2007 and re-flotation in 2010 at 165p a share.

Churning a people business can be a distraction from running it, and introduce uncertainties for staff. But the table shows how, since 2011, the operating margin has doubled over 40%, likewise annual return on equity near 22%. This could not be achieved without retaining capable managers, helping the business to enjoy an aspect of operational gearing now fund assets have soared over £36 billion.

Since Jupiter is oriented mainly towards individual investors, there is a risk of inflows stalling and redemptions rising in a risk-off recessionary climate: the inherent dilemma and aspect of cyclicality, with asset management.

Yet, Jupiter's track record over recent uncertain years suggests people may increasingly decide to ride out volatility. Reducing state retirement provision and greater self-employment are main reasons driving people to take control of their financial future, and Jupiter is well-diversified across equity and bond funds to help achieve this.

At end-2015, 68% of its mutual fund assets under management had delivered above-median performance over three years (and rising), a key performance statistic.

Undemanding forecasts for 2016

A potential stall-factor for buyers is the flat earnings scenario for 2016; also it being premature to assume anything about 2017 given the risk of a recession as now anticipated by some economists (for what such forecasts are worth).

Results for 2015 quite showed the effect competition is having, given a 126% rise in net inflows and an 11.9% rise in assets under management translated into a relatively lower 8.7% rise in net revenue. Also, net management fees are expected to decline slowly over time due to international expansion and the growing fixed-income aspect of the funds.

Costs were pretty well contained, though: last year, as a proportion of net revenue, administrative expenses edged up from 49.2% to 49.7%, such that operating earnings rose a respectable 7.7% to £165.7 million. This is despite a 25% jump in variable staff costs to £66.4 million.

Mind how re-locating the London office is pushing up expenses - by £5 million on an annualised basis, from 2014 to 2015. Otherwise, Jupiter is making good progress with organic growth, diversifying its products, clients and geography. New fund launches involve Asia income, international absolute return and a global environmental/ecology fund.

Jupiter has a respectable stable of funds, although the question is: how might buyers' appetite be affected over the short to medium term?

Distribution is extending, for example through new offices in Italy and Spain; how might Brexit affect costs and regulation? More positively, such uncertainties account for why the stock is priced for a 7% yield.

A 13 April trading update cited a net £723 million inflow for the first quarter and "confidence that, as we extend our relationships with key distributors on a global basis and deliver outperformance after fees, we can continue to deliver profitable growth at attractive margins." Interims are due 27 July.

Returning excess cash to shareholders

Jupiter completed its post-listing debt reduction in 2014 and last year its net cash edged up 3.3% to £259.4 million, well in excess of capital/liquidity needs. The board has, therefore, directed an increase in the payout ratio: in addition to 50% of earnings paid out as ordinary dividends, special dividends follow after 10% of the cash has been reserved for investment/growth.

Versus figures in the table, a total 24.7p a share was paid in 2014 and 25.5p last year, implying consensus forecast of 24.0p this year as likely conservative. "We believe our growth prospects allied with the consequent yield potential make for an attractive model for shareholders."

So despite uncertainties of a European recession and another slide in financial markets, Jupiter is robust to sustain a long-term high pay-out policy, hence is one for income buyers.

For more information see the website.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.