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When it comes to income investing, high dividend yields can catch the eye of income-hungry investors. The Human Group (LSE:EMG), a global investment management company, currently offers a healthy yield of 6%. But this FTSE 250 a no-brainer company? Let's get into the details and see if this opportunity is as good as it looks.
A financial giant
First, let's talk about what the company does. Like some of the world's largest investment managers, the company provides value and discretionary investment strategies. With a market cap of £2.5bn and over £108bn of assets under management, this is no small feat in the financial world.
Now, onto the important numbers. Interestingly, the discounted cash flow (DCF) calculation suggests that the current price is about 64.5% below the average fair value. While such a valuation is far from guaranteed, it is a very strong indication that there is a lot of value here if management can make a breakthrough in the next few years. In addition, annual revenue is expected to grow by 15.62% over the next three years.
For me, looking at the competition is always important when you see a company or sector trading so far below what the numbers suggest is a fair valuation. The company's price-to-earnings (P/E) ratio stands at an estimated 9.9 times, which is low compared to its competitors' average, which stands at 17.6 times.
Budget
But what about that tempting 6% dividend yield? It's really attractive in today's uncertain economic climate. However, I always feel that it is important to look beyond the title number.
I would say that it is very important to note the unstable profit record in the past. This is something cash-oriented investors should keep in mind, as consistency is often valued when it comes to dividend payouts. With profits forecast to rise to 7.5% by 2026, any change in strategy could depress the market.
A lot of danger
The business operates in a notoriously volatile industry, where performance can fluctuate according to market conditions. The company's revenue and profits have shown significant volatility in recent years, which may impact budget stability. Furthermore, a firm's wealth is closely related to its ability to attract and retain investor capital – a challenging task in a competitive environment.
The company's global positioning, while providing diversification, also exposes it to currency fluctuations and various regulatory conditions. Additionally, as with any investment company, there is always the risk of reputational damage due to poor fund performance or potential scandals, which could lead to investors moving elsewhere.
Not me
So, does this make sense for income? However, like most things, it's not that simple. As most sectors of the market have risen over the past year, shares have fallen by 1.1%.
Obviously, the company comes with complexities that need careful consideration. So this isn't really a 'set it and forget it' income stream that some investors may be looking for. I think there are better opportunities out there, so I won't invest just yet.
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