Man Group's Massive Dividend: How Long Can It Last?

Published in Company Comment on 24 July 2012

Man Group (LSE: EMG) yields 19%, even after the today's share price jump.

Man Group (LSE: EMG) has confounded investors for many years now by continuing to pay out a huge dividend while its profits have remorselessly declined. This morning, the hedge fund manager stuck to its guns again, saying it would hold its interim dividend at 9.5 cents (6.12p in real money) and 22 cents for the full year.

Even though the shares jumped 10% to 76p this morning, the estimated full-year dividend of 14.2p represents a (totally insane) forecast yield of 18.7%. Normally, anything higher than 50% the average payout of the FTSE 100 (UKX) -- currently at 3.8%)-- is considered a warning signal. Man Group's yield is currently around 400% higher.

Man Group's problems are pretty simple. For years, its 'black box' trading strategies generated consistently high returns. A few years ago, they stopped working, and performance flatlined. As the funds earned most of their money through performance fees, profits tumbled.

Man Group has attempted to steady the ship through a series of acquisitions, most notably of GLG and most recently of FRM, but funds under management continue to decline. In the last six months, for example, its funds under management fell from $58.4bn to $52.7bn.

So today we saw the announcement of more cost cutting, with $100m to be taken out of the business over the next 18 months. With underlying profit before tax coming in at $121m for the last six months, this could significantly boost the bottom line, but it's difficult for outsiders to gauge what impact it might have on the long-term prospects for the shares. And Man Group is still working on delivering cost savings of $95m it announced back in March.

The one thing is Man's favour is its net cash position. With some $700m in surplus capital, it can afford to pay out its bumper dividend for a little while longer. But sooner or later, and probably sooner, the dividend will have to drop so that it better matches the underlying cash flow generated by the business. That could still mean the dividend paid will be pretty attractive relative to the rest of the market, but it's difficult to see when the decline in Man's business is going to be arrested.

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> Stuart does not own any of the shares listed above.

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