The beauty of dividend stocks is the consistency of regular payouts. Dividend stocks pay their shareholders simply for being shareholders.
Most stocks pay quarterly, which gives investors four dividend payouts a year to look forward to. There are a few important dates investors should know. One of which is the ex-dividend date. Investors must buy a stock before the ex-dividend date in order to receive the upcoming dividend payment.
Waddell & Reed Financial Inc. (WDR) has an ex-dividend date of October 10, which means investors who hold the stock through this date will receive the upcoming dividend payment. In this case, Waddell & Reed’s quarterly dividend rate of $0.25 adds up to an annual dividend of $1.00 per share, equaling an attractive 4.7% yield.
Business Overview & Growth Prospects
Waddell & Reed is a financial services company. It offers investment advisory and management services. This is a challenging climate for Waddell & Reed, as the company is caught up in the broader industry downturn. Professional asset managers are under pressure from discount brokers and low-cost exchange-traded funds, which threaten the traditional mutual fund and advisory businesses.
Waddell & Reed’s second-quarter report showed the impact of these various headwinds. Assets under management, or AUM, declined 2% from the previous quarter, and compared with the second quarter of 2017. Fortunately, revenue increased 3% from the same quarter last year. Earnings-per-share nearly doubled from the year-ago quarter, due to revenue growth and a huge boost from tax reform.
Waddell & Reed’s financial struggles resulted in a 45% dividend cut in early 2018. But the company is on firmer ground, and its turnaround has gained strength over the course of the year. AUM increased 1.2% to $80.2 billion in August. The company is still highly profitable, and the reduced dividend will be more sustainable going forward. Waddell & Reed should be able to return to growth in the years ahead, thanks to its competitive advantages.
Its competitive advantage is a leading position in its core niche market, which is serving individual investors and smaller advisors. The core advisory business includes a national network of financial advisors, which provides comprehensive, personalized services to clients. The bulk of Waddell & Reed’s advisory client base is middle-income to affluent individuals and families. It has targeted the lower end of the financial services market, where there is less competition. As a result, Waddell & Reed has carved out a sizeable portion of the market, and has developed a significant amount of brand power.
Shareholders Are Paid Well To Wait
While Waddell & Reed works through its turnaround, shareholders are paid well to be patient. Waddell & Reed has declared its next dividend to be paid on November 1, to shareholders of record on October 11. With an ex-dividend date of October 10, investors who purchase the stock before this date will receive the upcoming $0.25 per share dividend payment.
On an annualized basis, Waddell & Reed has a dividend yield of 4.7%. This is a high yield, at more than double the average dividend yield in the S&P 500 Index. The annualized dividend payout of $1.00 per share appears to be sustainable. Waddell & Reed is expected to generate earnings-per-share of $2.05 in 2018, meaning the current dividend represents less than half of earnings. A dividend payout below 50% indicates the company should be able to maintain the dividend.
Plus, the stock could be significantly undervalued. Shares currently trade for a price-to-earnings ratio of 10.5, based on expected earnings-per-share for 2018. Fair value for Waddell & Reed should be closer to 12.5 times earnings, since the company is still profitable and has a positive growth outlook. As a result, the stock appears to be undervalued by approximately 19%. Waddell & Reed’s total returns could exceed 12% per year, from a combination of earnings growth, dividends, and valuation changes.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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