Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

What's Behind Federated Investors' Tantalizing Dividend?

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

What's Behind Federated Investors' Tantalizing Dividend?

Article excerpt

Dividend-seeking investors may salivate at the +4 percent yield sported by Federated Investors.

The payout reflects an 8 percent dividend hike that the Downtown investment manager disclosed in April when it announced first quarter results.

Raising the dividend is the one way to increase the yield. Lowering the stock price accomplishes the same thing. Federated has done both.

Federated shares have fallen nearly 24 percent since the announcement, closing Thursday at $23.68, off 22 cents.

Analysts blame the slide on several factors: disappointing first quarter results; worries about a pending acquisition; a drop in the equity assets Federated manages; and investors' pining for lower-fee mutual funds.

"When you get a 4.5 percent yield, there's going to be some issues," said Greg Melvin, chief investment officer of C.S. McKee, a Downtown investment manager.

Nevertheless, Mr. Melvin, who worked at Federated early in his career, recently bought the stock for his personal account. He believes the dividend is safe, but like other investors, he is wary of the issues facing the company.

Federated earned $60.3 million, or 60 cents per share, in the first quarter, about a nickel per share less than analyst estimates. Revenue of $264 million also fell shy of the $278 million Wall Street forecast. The shares dropped 13 percent the following day.

One of the first quarter developments that concerned Morningstar analyst Greggory Warren was the $2.3 billion that flowed out of Federated's equity mutual funds. He called it "the company's worst showing ever" in a report to investors.

A major culprit was Federated's Strategic Value Dividend fund. Since Halloween, assets in the underperforming fund have dropped 18 percent. The bleeding continued in May, according to a June 6 report from J.P. Morgan analysts who follow Federated. They said the fund lost an average of $350 million a month from February through May. Assets now stand at about $11.5 billion, down from $14 billion at the end of October.

"We think it is fair to think that the worst for flows is not yet over for this fund unless fund performance rebounds noticeably," the analysts wrote. …

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