I’ve flirted with M&G (LSE:MNG) shares for some time. The global investment manager currently offers investors a huge 9.8% dividend yield, making it the biggest yield on the FTSE 100.
Obviously that yield is massively attractive. But we know that big dividends can sometimes be a warning. And, of course, a dividend is by no means guaranteed — it can be changed or cut at anytime.
So, let’s take a closer look at this dividend giant. Should investors snap up this investment manager?
One year’s performance
Over the past 12 months, the M&G share price has fallen by 7%. So if I had invested £1,000 in the stock a year ago, today I’d have £930, plus dividends.
Thankfully, with the dividend yield being around 9% if I had bought a year ago, I’d have received £90 in dividends.
So, in terms of total returns, I’d be up £20 on my £1,000 investment. But with inflation in double digits for much of the past 12 months, I’d have hoped for more than 2% on my investment.
It’s interesting to note that the stock is also around 7% down on its launch price in 2019. Since its de-merger from Prudential plc in October 2019, it has been listed on the London Stock Exchange.
The dividends
M&G has the biggest dividend yield on the index right now, by about 1%. But just how safe is this dividend?
Well, from my calculations, it’s certainly not secure.
In 2020, the dividend was well-covered by earnings. Earnings per share came in at 44.4p and this covered the dividend per share of 18.2p more than twice over.
However, 2021 was a tougher year. The investment corporation only achieved 3.3p in earnings per share, but the dividend was raised to 18.3p. And in 2022, the company swung to a loss while the dividend rose to 19.6p per share.
The Solvency II ratio declined from 218% for 2021 to 199% in 2022 after incurring a loss after tax of approximately £1.62bn. This includes the impact from dividends, share buybacks, and the dilution from recognising deferred tax assets as a result of marking to market losses on its assets.
As the Solvency II ratio highlights, M&G has the capital to continue paying the dividend for several years, excluding the impact of huge losses. But the dividend has eaten away at the company’s capital.
A risk worth taking?
M&G expects performance to pick up in 2023 and 2024. Last year, capital generation tanked from £1.87bn in 2021 to a loss of £397m. But going forward, M&G says it’s on track to achieve £2.5bn worth of capital generation by 2024.
There’s clearly confidence within M&G’s top brass, indicated by the decision to hike the dividend by 7.1% to 19.6p per share in March and push through a £503m share buyback.
I wish this was one of the many stocks I added to my portfolio in March when financials tanked. But it wasn’t and it’s up 11% since then.
I do think this stock could be worth the risk, but I don’t have the capital to act right now.
