Dividend stocks with a very high yield should be viewed cautiously by investors. Typically, stock prices and dividend yields are inversely related. It means a stock offering a rising dividend yield is often a result of its beaten-down share prices.
In addition to a company’s dividend yield, you need to look at various other factors, such as its payout ratio, earnings profile, and balance sheet strength.
One TSX stock that currently offers you a dividend yield of more than 17% is Fiera Capital (TSX: FSZ). Valued at $522 million by market cap, Fiera Capital is an investment manager that provides services to institutional investors, private clients, and mutual funds. It manages separate client-focused equity, fixed-income, and balanced portfolios.
Fiera Capital invests in global public equity and fixed-income markets and generates a majority of its revenue from fees and commissions.
The TSX stock pays shareholders an annual dividend of $0.86 per share, translating to a yield of 17.3%. Let’s see if Fiera can sustain its high dividend yield amid an uncertain and volatile macro environment.
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How did Fiera Capital perform in Q3 of 2023?
Fiera Capital’s sales were down 1.2% year over year by $1.9 million in the third quarter (Q3) of 2023 due to a lower share of earnings in joint ventures and partnerships as well as lower transaction fees from tepid deal activity. The revenue decline was offset by higher base management and performance fees.
Fiera’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) fell 2.9% due to falling sales and higher operating expenses.
Fiera Capital emphasized a significant shift in market sentiment resulted in a reversal in equity market performance at the end of Q3 and a large shift in the yield curve, which impacted bond markets. Basically, unfavourable markets resulted in a decline of $4.7 billion in assets under management or AUM, which includes a $3 billion fall in fixed-income AUM.
During its Q3 earnings call, Fiera Capital noted, “We remain pleased with our operating performance in the face of market volatility, which has shown a year-over-year increase in base management fees. This performance, along with our positive free cash flow, enabled us to reduce our debt as well as significantly improve our last twelve-month free cash flow in the third quarter.”
What is the payout ratio for Fiera Capital stock?
In the last 12 months, Fiera Capital has reported a free cash flow of $98 million and paid shareholders a dividend of $73.7 million, indicating a payout ratio of over 75%. Moreover, in the first nine months of 2023, the company paid over $36 million in interest expenses, an increase of 20% year over year due to higher interest rates.
Asset managers such as Fiera Capital need to grow their AUM consistently, which, in turn, is a key driver of fees and revenue. When market sentiment deteriorates, investors tend to shift their capital toward lower-risk asset classes such as gold. Alternately, asset management companies benefit from bullish market sentiment, resulting in higher AUM and rising fees.
Fiera Capital needs to generate enough cash flows to sustain its operations, pay shareholders dividends, and make regular interest payments. Currently, it has managed to navigate a challenging macro environment successfully. But the stock is down 67% from all-time highs and has burnt massive investor wealth.
