If you’ve reached 40 years of age and have no savings to rely on in retirement, then I think asset manager M&G (LSE: MNG) should be one of the first acquisitions you make for your portfolio.
Spun off from insurance group Prudential at the end of October, M&G is a new business with a long history. The company can trace its roots back to 1848 and has been managing money for investors across the UK ever since.
Business breakup
Following the spin-off, M&G is today made up of Prudential’s UK insurance and asset management businesses. The remaining Prudential business consists solely of the insurer’s Asian and US companies.
City analysts believe this Asian business has brighter prospects. The UK insurance and asset management industry is relatively mature, with hundreds of asset managers fighting for market share. M&G is also struggling to fight back against the rise of low-cost passive investment trackers. Its retail asset management business lost a net £3.8bn in the first half of 2019 alone.
Still, despite these pressures, the group remains a force to be reckoned with in the asset management industry, and its size is possibly the company’s most significant advantage. M&G is the UK’s third-biggest listed fund business with £341bn in assets.
Income champion
Following the split, City analysts believe M&G has the potential to report a total net profit of £1.1bn for 2019, falling to £700m for 2020, the company’s first full year as an independent business.
As the figures for 2019 are likely to be distorted by divorce costs, I think the numbers for 2020 are a more reliable indication of M&G’s prospects.
On this basis, the stock is trading at a forward P/E of 8.2, which looks cheap compared to the rest of the asset management sector. The rest of the industry is trading at a median P/E of 14.
On top of this highly attractive valuation, City analysts reckon the firm has the potential to become an income champion as well. Estimates for how much money the company will distribute to shareholders over the next two years vary, but on average, City analysts are forecasting a total distribution of 15.3p per share for the 2019 financial year, and 18.4p for 2020. That gives an overall potential distribution of 33.7p the next 18 months, or a yield of 14% on the current share price.
Over the medium term, analysts are expecting the company to distribute around two-thirds of earnings, which suggests investors can look forward to a dividend yield of 8% on the current share price for the foreseeable future.
The bottom line
So all in all, it looks to me as if M&G is a tremendous long term income investment, and there’s also the potential for substantial capital gains if the stock’s valuation rises to meet the rest of the sector.
In fact, if it does, I think there is a good chance shares in M&G could double investors’ money over the next few years with a combination of income and capital growth.
