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.

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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.

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