If you are looking for a FTSE 100 dividend stock with the potential to increase in value significantly next year, then I highly recommend taking a closer look at asset management group M&G Plc (LSE: MNG).
After splitting from its parent company Prudential in October, M&G is still a relatively unknown and misunderstood business.
When the spin-off took place, many investors decided to sell their shares in the asset manager rather than hold on to a business which didn’t have a track record as an independent entity. The firm’s recent decision to suspend its £2.5bn open-ended property fund has also hurt sentiment.
This selling has pushed M&G shares down to a P/E of 8.2 and EV/EBITDA multiple of three, 60% and 70% below the sector average respectively. These figures exclude any one-off additional costs the business might incur with its property fund suspension, which are not yet clear.
Bargain buy
I think this is going to change over the next 12 months. The market is waiting for the company to prove it can be a successful enterprise without its parent, and that should hopefully happen over the next year. M&G’s results as an independent entity should showcase its strengths, allowing investors time to consider its strengths and weaknesses.
City analysts are expecting big things from the group. As the figures above show, they think M&G is already seriously undervalued, even though earnings per share are set to fall over the next two years as the firm settles into its new position in the market.
I believe the market is also sceptical that the company can make good on its dividend promises to investors. A combination of special and regular dividends over the next 12-18 months put the stock’s dividend yield in the double digits, according to City analysts.
After these payouts, analysts reckon the company will settle into a long-term trend of targeting dividend cover of 1.5, which suggests a dividend yield of 8% by 2020, based on current earnings projections. That’s nearly double the FTSE 100 average, or 4.5%.
Downside protection
But what happens if M&G’s growth doesn’t live up to the City’s expectations? Well, I think even in this worst-case scenario, investors could be set for a positive return in 2020. As noted above, the stock is currently trading at a deeply-discounted valuation, which gives a healthy margin of safety if the firm’s earnings fall further and faster than expected.
On top of this, the company is already committed to a series of regular and special dividends over the next 12 months, which means investors will receive an income boost no matter what happens to the stock price.
The bottom line
Considering all of the above, I think it’s highly likely M&G shares will produce a positive return in 2020. That’s why I’m recommending it as a top FTSE 100 income investment for the year ahead.
The group’s low valuation should provide protection against the downside while offering the potential for substantial gains from current levels if M&G beats the City. In the meantime, investors can look forward to that high single-digit dividend yield.
