Is this dividend star also the best bargain in the FTSE 100?

This FTSE 100 stock pays a whopping 8%+ yield, looks very undervalued against its peers, and is set for stellar earnings growth in the next three years.

| More on:
A pastel colored growing graph with rising rocket.

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.

FTSE 100 global investment manager M&G (LSE: MNG) has now recouped nearly all its losses from March 2023. 

These came from fears of a new financial crisis after Silicon Valley Bank and Credit Suisse failed.

A genuine financial crisis does remain a risk for the stock. And there have been concerns from some about its debt level.

It has a debt-to-equity ratio of just over 2. A healthy figure for many companies is regarded as being up to around 1.5.

However, for firms in high-cash-flow businesses — like insurance and investment — anywhere up to 2.5 or so is considered fine.

I believe this risk for M&G is mitigated further by short-term assets (£34.3bn) far outweighing its short-term liabilities (£13.1bn).

Additionally, its H1 2023 results show it should achieve operating capital generation of £2.5bn by end-2024. This huge cash war chest will allow it further leeway in meeting its debt obligations.

It can also provide a powerful engine for further growth. Analysts’ expectations are for earnings and revenue to increase, respectively, by 37.1% and 109.6% a year to the end of 2026.

Earnings per share is expected to grow by 39.3% a year to that point.

A dividend star

For 2022, M&G paid 19.6p a share, which — based on the current £2.26 price — yields 8.7%.

This could well increase, as the interim dividend for 2023 rose to 6.5 from 6.2p in 2022. If this was applied to the total dividend then the payment would be 20.54p. At the current share price, this would give a yield of 9.1%.

Before that, M&G provided a dividend yield of 9.2% in 2021, from an 18.3p payout. The yield was the same in 2020, from an 18.23p payout.

By comparison, the average yield of the FTSE 100 in 2022, 2021, and 2020 was 3.7%, 3.7%, and 3.2%, respectively.

The best bargain in the Footsie?

There are many bargains currently in the FTSE 100. This is partly due to a broad mark-down of UK economic prospects after the Brexit decision in 2016, justified or not. And it is also due to a lack of technology stocks that have powered gains in other global indices.

Overall, the FTSE 100 traded at an average price-to-book (P/B) of around 2 in 2023, and it remains about the same now. This compares to about 4.2 for the S&P 500 in 2023 and around 4.7 now.

For M&G shares, their recovery from March 2023’s mini-financial crisis does not mean they have no value left.

Using the P/B metric, the stock is trading at the bottom of its peer group, at just 1.3.

Man Group is at 2.3, Intermediate Capital Group at 2.6, St. James’s Place at 2.8, and Hargreaves Lansdown at 4.9. This gives a peer group average of 3.2.

A discounted cash flow analysis shows M&G shares to be around 46% undervalued at the current price of £2.26.

Therefore, a fair value would be around £4.19.

The stock may never reach that price, of course. However, it does confirm to me that it looks like one of the best bargains in the FTSE 100.

Given its strong earnings outlook, high yield, and good value share price, I am happy to keep my holding in the company.

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 positions in M&g Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc 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

Investing Articles

£10k in an ISA? Here’s how I’d target a regular £30k+ second income stream

Reliable dividends can help provide a lot more financial freedom. Here's how I'd aim for a substantial second income inside…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Lloyds share price hanging on to 50p ahead of Wednesday’s Q1 earnings report. Where to now?

Down in April and with low earnings expected this week, Mark David Hartley investigates where the Lloyds share price might…

Read more »

artificial intelligence investing algorithms
Investing Articles

Everyone’s talking about AI! Here’s 1 FTSE stock to consider buying for exposure

A hot topic right now is artificial intelligence (AI). This Fool explains how this FTSE stock could offer investors an…

Read more »

British Pennies on a Pound Note
Investing Articles

1 penny stock I’d buy today while it is 99p

Ben McPoland highlights Windward (AIM:WNWD), a fast-growing penny stock that could benefit from the artificial intelligence revolution.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This forgotten FTSE 100 gem could be the best bargain on the stock market

The FTSE 100 is full to the brim of high-quality businesses. But this Fool has his eye on this 'forgotten'…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s a FTSE 250 stock I’d put 100% of my money into

If this Fool could buy just one stock from the FTSE 250, Games Workshop would be his choice. Here, he…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

2 reasons Warren Buffett might love this stock, and 1 reason he might avoid it like the plague

Warren Buffett's one of the best stock pickers of all time. But would he approve of Barclays shares? This Fool…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Down 28% in a week! What’s going on with the share price of this FTSE 250 British icon?

There’s one stock in the FTSE 250 that took a bit of a battering last week. But I’m not surprised,…

Read more »