Are these 6.8% yielding UK shares a value trap?

I am constantly looking for stocks to add to my portfolio. At the moment I have some UK shares in a well-known fund manager. They have risen more than 60% since their lows in October, but are still yielding 6.8%. On top of that, despite the recent increase in stock prices, I can still buy them for 7% less than I would have paid a year ago.

I’m trying to decide whether the stock in question is a bargain, I should stock up on it – or it can be a value trap.

A well-known fund manager

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

Despite the stupid name, it is a serious company with an established business. Last year, it made a post-tax profit of £1 billion. That gives us an attractive net profit margin. Last year’s revenue was £1.7bn, so a net profit of 59%. With a current market capitalization of £4.3bn, the price-to-earnings ratio could be less than five. That sure seems cheap to me.

But when a stock has juicy yields and is undervalued, it can be a red flag for me as an investor. What is true when it comes to UK stocks?

challenging times

Of course, Abrdn had difficulties.

Fund managers generally don’t like investors. competition Jupiter has seen the stock price plummet 36% in the past year, while Schroders down 22% in the period. It reflects investor anxiety that volatile stock markets and tight household budgets could keep people from investing in funds, hurting sales and profits for companies like Abrdn.

I see this as an ongoing risk. In addition, Abrdn has the form to cut dividends. By 2020, the annual payment is reduced by almost a third. It has been flat since then. So, while the dividend yield is attractive, it is not growing and if business deteriorates, cuts may be on the cards.

Business potential

If it looks that way, Abrdn could still be a value trap – especially if its business performance disappoints.

However, I also think it could be a bargain for my portfolio, even after the strong stock price rally. The company has a well-established place in the asset management industry and deep experience. That can help attract clients and also navigate anything in the market.

The business model seems to be very profitable in general, as shown by the juicy margins mentioned above. However, at this year’s interim stage, pre-tax profits were replaced by a huge loss of £320m, while profits fell by 8% compared to the previous year’s period.

My movement

I think Abrdn has a solid business and am happy with the results. So I will continue to hold the shares I have. But there are risks and the clear performance in the first half of the year gives limited reason for confidence in current business trends for asset managers.

So, although I don’t see it as a value trap, I wouldn’t add Abrdn again to my current UK stock portfolio.