For income-focused investors, the allure of a substantial dividend yield can often mask underlying risks, a scenario perfectly embodied by certain FTSE-listed companies navigating volatile market conditions.
Ashmore Group, a specialist in emerging market investments, currently boasts an impressive 9.5% dividend payout. This attractive yield, however, stands in stark contrast to its share price performance, which has plummeted by over 50% in the last five years, raising questions about its sustainability.
The significant decline in Ashmore’s share price since 2020 is largely attributable to challenging conditions within emerging markets. As a dedicated emerging market investment group, its performance has been directly impacted by economic struggles that followed global disruptions, leading to poor investment returns.
Consequently, the firm experienced substantial client capital withdrawals, exerting considerable pressure on its revenue and profits. However, recent trends indicate a potential turnaround, with emerging markets showing signs of a robust recovery, evidenced by the MSCI Emerging Market Index’s notable rise over the past year.
A weakening US dollar has played a crucial role in bolstering emerging economies, facilitating their recovery. This macroeconomic shift, coupled with improving business growth and earnings reports from these international stocks, has contributed to a more positive outlook for the sector, stabilizing the outflow of Ashmore’s assets under management (AUM).
Despite profits remaining significantly below 2021 levels, Ashmore’s strong cash flow generation has allowed management to maintain its high dividend payments. Yet, this strategy faces notable risks. Geopolitical tensions could derail recovery in key emerging markets, and risk-averse investors might still hesitate, impacting the business’s ability to deliver strong returns.
A critical concern is that the company is currently distributing more in dividends than it generates from its operations, a potentially unsustainable practice in the long run. While Ashmore does possess a healthy cash reserve of approximately £308 million and negligible debt, institutional consensus suggests that without a significant earnings recovery within 18 months, a dividend cut might become unavoidable.
Ashmore’s cyclical downturn shows early signs of bottoming out, hinting at a nascent recovery. However, the pace and certainty of this rebound are highly uncertain. With capital outflow still outpacing inflow, the pressure is mounting for management to boost its assets under management or face difficult decisions regarding shareholder payouts.
Ultimately, Ashmore represents a high-risk, high-reward proposition for investors seeking substantial income opportunities in 2025. Its fortunes are heavily tied to the unpredictable momentum of emerging markets, a factor largely beyond its control, making it a speculative investment strategy for those wary of significant market volatility.
