For many years, I have reviewed my two main FTSE 100 investment portfolios – high-yield, and high-growth — in early January.
At this, and my mid-year review, I decide whether to sell, add to, or maintain each of my holdings. I monitor all of them daily as well, of course, but these two reviews are the major portfolio evaluations.
Looking at my M&G (LSE: MNG) shares, I was struck by how close they are to their one-year high.
That peak preceded the mini financial crisis in early March caused by the failures of Silicon Valley Bank and Credit Suisse.
It seemed obvious to me that the fears of contagion were overblown, so I bought several FTSE 100 financial stocks.
No crisis emerged, but a real one in the future is a risk for the company. Another is that inflation and interest rates might stay high, acting as a deterrent to new client business.
The question for me now is do I sell M&G shares, keep what I have, or buy more?
Is the stock still good value?
Given the recent price rise, my starting point is to establish if the shares are still good value.
Using a core basic metric, the price-to-book (P/B) ratio, I see M&G is trading at 1.3. RIT Capital Partners’ is at 0.7, Burford Capital at 1.4, St. James’s Place’s at 2.8, and Wise at 11.5.
This gives a peer group average of 4.1, and M&G’s 1.3 is very undervalued compared to this.
To ascertain what a fairer value for its shares might be, I applied the discounted cash flow (DCF) model. Given the assumptions involved in this, I used several analysts’ valuations as well as my own.
The core assessments for the company are around 45% undervalued. This would give a fair value per M&G share of £4.02, against the current £2.25.
This does not mean that the shares will reach that point. But it does underline to me that they still offer very good value.
Is the business on an uptrend?
These numbers look excellent to me, but they could be false friends if the business is not set to grow.
M&G’s H1 results showed it is on track to achieve operating capital generation of £2.5bn by end-2024. This on its own can provide a powerful engine for further growth.
Overall, adjusted profits before tax in H1 increased 31% to £390m against the same period last year. Consensus analysts’ expectations were for just £284m.
Analysts’ expectations are now for earnings and revenue to grow, respectively, by 39.4% and 109.7% a year to end-2026.
A high yield on top
In my view, the shares are significantly undervalued against their peers and the business is set for major growth.
A huge additional positive is that it paid a 19.6p dividend last year, giving a current yield of 8.7%.
But this may increase, based on the rise in the interim dividend from 6.2p to 6.5p. If this was applied to the total dividend, the payment would be 20.54p.
At the current share price, this would give a yield of 9.1%.
These factors make it look like one of the best bargains in the FTSE 100 to me and I intend to buy more shortly.
