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When it comes to passive income investing, high dividend yields can certainly attract the attention of income-hungry investors. Group of men (LSE:EMG), a global investment management firm, currently offers a juicy dividend yield of 6%. But is this the case? FTSE 250 Index Is it a good idea to buy a company? Let's look at the details and see if this opportunity is as good as it seems at first glance.
A financial giant
First, let’s talk about what the company does. As one of the world’s largest alternative investment managers, the firm offers a range of quantitative and discretionary investment strategies. With a market capitalisation of £2.5bn and over £108bn in assets under management, it is no small player in the financial world.
Now, let's move on to the numbers that matter. Interestingly, a discounted cash flow (DCF) calculation suggests that the current price is about 64.5% below a fair value estimate. While such an estimate is far from guaranteed, it's a pretty clear indicator that there's a lot of value here if management can succeed in the coming years. Furthermore, annual earnings are projected to grow by 15.62% over the next three years.
For me, looking at the competition is always critical when I see a company or sector trading well below what the numbers suggest is a fair valuation. The company's price-to-earnings (P/E) ratio stands at a modest 9.9 times, which is relatively low compared to the average of competitors, which stands at 17.6 times.
The dividend
But what about that tempting 6% dividend yield? It's certainly attractive in today's uncertain economic environment. However, I always believe it's critical to look beyond the headline number.
I would say that it is more important to consider the rather shaky dividend history in the past. This is something that income-focused investors should keep in mind, as consistency is often an important value when it comes to dividend payments. With dividends forecast to increase by up to 7.5% by 2026, any change in strategy could disappoint the market.
Much risk
The company operates in a notoriously volatile industry, where performance can swing wildly based on market conditions. The company's revenue and earnings have shown significant fluctuations in recent years, which could impact the stability of dividends. In addition, the company's fortunes are closely tied to its ability to attract and retain investor capital, a difficult task in an increasingly competitive landscape.
The firm's global presence, while providing diversification, also exposes it to currency fluctuations and varying regulatory environments. In addition, as with any investment firm, there is always the risk of reputational damage due to poor fund performance or potential scandals, which could lead investors to move elsewhere.
Not for me
So is this a no-brainer when it comes to passive income? Well, as with most things, it's not that simple. Even though many sectors of the market have soared over the past year, stocks are down 1.1%.
Clearly, the company has complexities that require careful consideration. So, it's not exactly the “set it and forget it” passive income stream that some investors might be looking for. I think there are better opportunities out there, so I won't be investing for now.
