Earlier this week, I screened the UK market for cheap stocks with high dividend yields, and one name that popped up was Polar Capital Holdings (LSE: POLR).

It currently has a price-to-earnings (P/E) ratio of 7.6 and a yield of 6.2%, meaning that it’s both dirt cheap and paying out tons of cash to shareholders. Given these stunning metrics, could it be worth considering for a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP)?

Who’s Polar Capital?

Polar Capital Holdings is a London-based investment management firm that has around £44bn assets under management (AUM). Over the last decade, it’s had a lot of success with technology funds.

Its flagship is the Polar Capital Technology Fund, which has around £17bn AUM. This has been a phenomenal performer, delivering a return of nearly 1,000% for investors over the last 10 years.

This stock’s cheap

Shares in Polar Capital currently trade for around 740p. That’s down from near 1,000p back in July. At that price I reckon there’s value on offer. With earnings per share of 96.9p expected for the financial year ending 31 March (giving us a P/E ratio of 7.6), the stock’s trading at a massive discount to the UK market.

It’s worth noting that earnings per share last financial year were 57.8p. So with earnings projected to grow 68%, the stock has a very low price-to-earnings-to-growth (PEG) ratio, which suggests it’s cheap.

Interestingly, the average analyst 12-month price target is 1,131p. That’s around 50% above the current share price.

The dividend yield’s huge

Turning to the dividend forecast, it’s 46.2p per share for this financial year. At today’s share price, that equates to a yield of 6.2% – around twice the FTSE 100’s yield.

Notably, dividend coverage (the ratio of earnings to dividends) is over two times. That suggests the payout’s secure.

What’s the catch?

So we have a stock that’s trading at a massive discount to the market while sporting a massive yield. What’s the catch?

Well, one major risk is the shift away from actively-managed investment funds towards passive index funds. Polar Capital’s an active investment manager, so it could face structural challenges in the years ahead.

Another is that much of its AUM is in tech-focused funds. If we see a major tech/AI meltdown and its AUM plummets, earnings will mostly fall and dividends may be lower.

A third issue is that the company recently tweaked its dividend policy. It now expects to return at least 50% of adjusted core profits to shareholders through an ordinary dividend, paid on a half-yearly basis.

The previous policy was that dividends could be 55%-85% of adjusted total earnings. It still aims to grow returns to shareholders over time but this will be through a combination of dividends and share repurchases.

My view

Overall, there are a few risks here. In no way is this stock a guaranteed winner. That said, I like the risk/reward skew at today’s share price. I reckon it’s worth a closer look.

Should you invest £5,000 in Polar Capital Plc right now?

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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Polar Capital Plc made the list?

Edward Sheldon does not hold any positions in the companies mentioned.