Today is a brilliant time to buy FTSE 100 stocks to generate passive income as there are some massive yields out there.
One share has just caught my eye, asset manager M&G (LSE: MNG). It yields 9.4%, making it among the most generous income stocks on the index.
That’s a lot of passive income
As ever, I’m both excited and wary when I see such a high dividend. Excited, because with income of almost 10% a year, I’ll roughly double my money in a decade even if the share price goes nowhere. Wary, because it’s often a sign of a company in trouble.
Dividend yield is calculated by dividing shareholder payouts by stock price. When the shares crash, the yield can rocket. So I wasn’t surprised to see that M&G shares have fallen 11.32% in the last six months, and 15.74% over three years
M&G broke away from insurer Prudential in 2019 and has delivered a little share price growth since, but the yield has always been consistently high. So is this stock a Dividend Aristocrat, or just faking it?
As abrdn and Schroders can testify, 2022 has been tough on FTSE 100 fund managers. When markets fall, assets under management (AUM) inevitably follow suit, while outflows from disillusioned investors increase.
In the first half of the year, M&G’s AUM fell by £21.1bn to £348.9bn. That was mostly due to market falls, with net client outflows an impressively low £1.2bn. Adjusted pre-tax operating profits nonetheless fell from £327m to £182m.
Given market conditions, that neither surprises nor worries me. Given that I prefer to buy stocks when they’re falling rather than rising, it even tempts me. When stock markets recover, I would expect the outlook for M&G to brighten.
In two minds about M&G
M&G looks solids, with a “very strong” shareholder solvency II rating of 214%. It generated £433m of operating capital in the first half, up 40% on the previous year, and is targeting £2.5bn by the end of 2024.
However, net debt is fairly high at £3.26bn, against a market cap of £4.53bn. That bullet needs biting at some point.
Something else worries me. In 2020, earnings per share of 44.4p nicely covered the dividend per share of 18.23p. Yet in 2021, EPS fell to just 3.3p while the dividend was lifted to 18.3p. Today, cover is just 0.2, well below the ideal figure of 2.
Management remains committed to the dividend, recently announcing an interim dividend of 6.2p per share, up from 6.1p last year. That’s in line with its policy of paying one-third of the previous year’s total dividend. The payout should be safe, so long as we do not get a protracted stock market downturn.
The price-to-earnings ratio is a very costly looking 58.98 times earnings, again, due to those hefty earnings swings. I’m sorely tempted by the M&G yield, but worried about some of these numbers. I’m sticking it on my watchlist, while I watch for the next set of earnings.
