Schroders: Downgrade To Hold Despite 10.6x P/E & 5.5% Dividend Yield

(Preview) Company Update (SDRC LN, SDR LN) (Downgrade to Hold)

Summary

• We downgrade Schroders to Hold, despite a superficially cheap valuation. We expect annualized returns to be high-single-digits.

• Shares have returned 38% in 3.5 years since our initiation, but earnings growth has been much weaker than we expected.

• Revenue CAGR has been at mid-single-digits despite a low-teens AUM CAGR, due to shrinking fee margins and a negative mix shift.

• Headwinds in Mutual Funds and Institutional should continue to pressure revenues, while operational leverage will likely remain elusive.

• EPS CAGR was 4.3% in 2018-21. We expect it to be in the 3-5% range in the future and for the P/E on Schroders stock to remain unchanged.

Introduction

We review our investment case on Schroders plc, a leading U.K. asset manager, whose shares are trading at 10.6x 2021 EPS and a 5.5% Dividend Yield.

We initiated our Buy rating on Schroders in March 2019, with a stated preference for its Non-voting shares. Since then Non-Voting shares have gained 38% (including 24% in dividends) in GBP …