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Investors in wealth management and financial services have had a volatile few years. many may know Santiago Square (LSE:STJ) as a dividend stock due to its generous yield of over 8%. However, I am surprised that he is not talked about as much as others in the FTSE 100. So is this potentially a must-have for investors looking to generate passive income?
Background
The company is a publicly held investment manager that manages equities, fixed income and balanced mutual funds for its clients. stocks have had a tough few years amid regulatory reform, intense competition and volatility in the bond market.
Changes to wealth management firms' transparency rules and fee structures are expected to cost the firm £150m by 2025. This has clearly spooked investors a bit, but I feel the fall in 50% in the last year is an overreaction.
However, as interest rates are expected to cool, the next few years could be a friendlier environment in which to operate.
the dividend
Despite the share price decline, the company continued to pay a very generous dividend of 8.26% annually. This is clearly attractive to potential dividend stock investors. However, I always want to evaluate whether the overall business is in good shape before investing. If there are shaky fundamentals beneath the surface and the dividend is suddenly cut, the share price could easily collapse.
Risks
There are a couple of concerns for me here, namely that the dividend is not covered by cash flow. If there is another period of volatility, there may be questions about whether the dividend needs to be reduced to a more conservative level.
The company has strong cash reserves to cover any near-term concerns. But since markets tend to look more forward-looking for dividend stocks, the share price could still suffer from falling fundamentals.
Future perspective
With new CEO Mark FitzPatrick at the helm since December, the company expects improvements in the coming years. Analysts seem to be optimistic about this and one of them suggests:
“Significant cuts to earnings per share, pressure on long-term fees and a high cost of capital, reflecting uncertainty under a new fee structure, already appear to be priced in.“
UBS Analysis
The company expects earnings to decline annually about 0.7% in the coming years, well behind the industry average of 18%. However, the return on equity (which reflects the level of efficiency of the business) is quite impressive at 29%, dwarfing the competition with an average of just 8.1%.
As a potential dividend stock investment, it appears that most of the worst-case scenario has already been reflected in the share price. A discounted cash flow calculation indicates that the fair value of the stock is 50% higher than the current price. The price-to-earnings (P/E) ratio of 9.6 times is also well below the industry average of 20.2 times.
I am buying?
There could well be big potential for this dividend stock, but with the business clearly in the process of trying to turn around after a difficult few years, I don't want to take any risks. Although the dividend is quite attractive as passive income, I believe that there are less risky investments. I'll stay away for now.
