A 9.5% yield now from this undervalued FTSE passive income star!

This FTSE 100 firm posted good H1 results, looks undervalued to its peers, and has a 9.5% yield to generate big passive income streams.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The FTSE 100 contains many stocks with a sufficient yield to generate significant passive income. Yet there are very few that pay over 9%. However, global investment manager M&G (LSE: MNG) is one of the few.

And until its share price spiked on better-than-expected H1 results, it even yielded over the magic 10% level. This rate allows investors to double their initial investment if it is sustained for 10 years.  

My starting point in selecting companies for consideration in my high-yield portfolio is naturally enough the dividend. But there are two other factors I look at before as stock makes the cut.

The first is how the core business looks. The second is the share valuation, as I do not want my dividend returns wiped out by stock losses.

These are always possible in any company and there are risks in this one as well, of course. The ongoing cost-of-living crisis may affect client inflows, for example. And there may be another financial crisis at some point, which might make trading profits more difficult to generate.

Share valuation

M&G’s shares are still down around 10% from their high this year, despite the recent bounce on good H1 results.

This does not mean that the firm is undervalued though. It may simply be that the business itself is just worth less now than it was before.

To get a better idea of its true value, I compared its price-to-book ratio (P/B) with those of its peers.

M&G currently trades at a P/B of 1.2. This is lower than all its immediate peers except one — RIT Capital Partners at 0.8. Burford Capital trades at 1.6, Curtis Banks Group at 3.3, and St. James’s Place at 3.6. 

These figures strongly suggest to me that M&G is significantly undervalued compared to its peers.

Core business

H1 results showed adjusted profits before tax increased 31% to £390m against the same period last year. This compared to consensus analysts’ expectations of just £284m.

Operating capital generation also rose over the same period — by 17% to £505m. This means that the company remains on track to generate its target £2.5bn in operating capital by December 2024.

Additionally positive for me is that its Shareholder Solvency II coverage ratio remained strong, at 199%. A ratio of 100% is the regulatory minimum for the industry.

Passive income

In its full-year 2022 results, it declared a total dividend of 19.6p. On the current share price of £2.07, this gives a yield of 9.5%.

If this remained over 10 years, then a £10,000 investment now would make £950 per year in passive income.

At the end of that period, an investor would have made an additional £9,500 to add to their initial £10,000.

This return would not include further gains from any reinvestment of dividends or share price appreciation. Conversely, there would also be tax liabilities, of course, and perhaps share price losses to factor into the net return.

I already have holdings in the sector. But even with these, I am seriously thinking about buying M&G shares. I believe the losses in the share price are unwarranted and will be reversed over time. I also expect it to stick to its history of very high yields.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Burford Capital and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »