With interest rates at record lows and traditional yield plays such as Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL) paying below average dividends, should investors look at Perpetual Limited (ASX: PPT) today?
The Australian equities fund manager's shares are forecast to provide a fully franked 5.4% dividend in FY 2017. This is 110 basis points higher than the market average and no doubt a tempting option for investors in search of income.
Personally, I would avoid Perpetual no matter how tempting it may appear due to a disappointing performance in the last financial year.
Perpetual's average funds under management (FUM) dropped 7% in FY 2016 from $32.3 billion to $30 billion. As you might expect this drop led to Perpetual's FUM fees dropping 6.7% to $213.7 million. As a result profit before tax dropped as well, this time by 6% to $118.1 million.
Whilst there could be countless reasons for its fund outflows, I wouldn't be surprised if some of its questionable investments are largely to blame.
In recent days it has been increasing its position in Myer Holdings Ltd (ASX: MYR), Nine Entertainment Co Holdings Ltd (ASX: NEC), and Clydesdale and Yorkshire Bank (CYBG PLC CDI 1:1 (ASX: CYB)). Three businesses I would stay well clear of.
Another reason I am quite bearish on the fund manager is the performance of its Global Share Fund. Perpetual is targeting $1 billion in FUM by August 2017 for this fund, but with it delivering a negative 4.5% return in the last 12 months it's hardly going to inspire confidence in investors.
If the shares were dirt cheap then I might be able to look beyond some of this. But at 17x estimated FY 2017 earnings its shares are more expensive than both Platinum Asset Management Limited (ASX: PTM) and IOOF Holdings Limited (ASX: IFL). Because of this I would give Perpetual a wide berth and focus on other areas of the market.
