Strange but true. One of the highest-yielders in the FTSE 100 is Man Group. Shares in the struggling hedge fund manager offer a prospective dividend yield of almost 12 per cent (in dollar terms).
Usually when a blue chip company yields that much it can only mean one thing — the dividend is about to be slashed.
And that, so it happens, is precisely the view of Morgan Stanley, which in a report published on Wednesday morning reckons a 45 per cent cut is looming.
Analyst Bruce Hamilton writes:
Whilst we expect that clarity on dividends unlikely before the May board meeting, and expect that the group will pay FY10e at $0.44 unchanged on prior year given the surplus, given our expectation that earnings likely run well below this level again in FY11e on below-average performance fees and slower recovery in sales momentum, we see an increasing likelihood that dividends will be rebased and assume a ~45% reduction in DPS to $0.25 for FY11e, implying just covered by FY11 earnings.
(Note: Man’s fiscal year runs to March).
That’s right even after a 45 per cent reduction, which would leave Man yielding 6.7 per cent, the dividend would only just be covered by earnings.
Why then does Hamilton think the outlook is so bleak?
In part it’s the well documented travails of the Man flagship managed futures fund AHL, which he thinks generates 75 per cent of group earnings, and the lower sales and reduced performance fees that flow from that:
Despite a 3% bounce in AHL over the past 3 weeks, the fund remains 16% below performance fee earnings levels as we enter FY11. As such we see significant risks that performance fees will again disappoint relative to consensus expectations and against historical trend in FY11. We model 23bps of performance fees in FY11 after 17bps in FY10e as we expect the contribution from AHL funds to remain modest.
Overall we expect that the combination of weak sales, fund de-leveraging and soft performance will see AUM decline further from the $42.4bn reported at Dec 09 to $39.8bn at March 2010.
The lack of announcement on private client Japanese fund launch we believe signals the challenges for near-term high margin fund raising for the group. As our previous analysis has highlighted, private client sales have typically correlated strongly with AHL performance with a 3-6 month lag. As such, even assuming a sustained rebound in AHL, we expect headwinds to private client sales likely to persist into FY11.
Bringing all those factors together, Hamilton has lopped 24 per cent off his earnings forecasts for 2011, which now stand at 38 cents a share.
And all of that is interesting because Man Group is sitting on $1.5bn of surplus capital. Given the pressures facing its core product it can’t be beyond the realms of possibility that Man might hit the M&A trial to create a smoke screen.
Hamilton reckons Man is still focused on acquiring a significant minority stake in an equity long/short manager (Lansdowne Partners springs to mind). Although he wonders whether any established, reputable long/short manager will really feel they need Man’s distribution capability.
In which case, Man might have to start looking at something rather bigger. Something like a quoted fund management group with a large hedge fund division.
Shares in Man Group are the biggest fallers in the FTSE 100 on Wednesday morning:
Related links:
Man hunt – FT Alphaville
Futures Funds Fall Most Since 1987 as AHL, Henry Miss Shifts – Long Room