The markets seem to have liked what they heard in the annual results of asset manager M&G (LSE: MNG). After their release today (21 March), the M&G share price hit a new 12-month high.
Despite that, could it still be good value?
After all, the dividend yield of 8.3% remains over double that of FTSE 100 peers.
Net client inflows jumped last year, adjusted operating profit before tax grew strongly and so did operating capital generation.
The market capitalisation of £5.7bn is less than eight times the adjusted operating profit before tax. So, is the M&G share price a potential bargain for my portfolio?
Strong business performance
I definitely think the business has a lot going for it.
M&G is a well-established firm with a strong brand and large customer base. Not only that, but it operates in a market sector with high demand that could get even bigger in future. As it pointed out in its results, over 12 million people in the UK alone are currently seeking assistance to achieve financial security. M&G operates in over two dozen markets.
One risk the company faces is clients withdrawing funds, for example due to choppy financial markets. That could lead to lower fees for M&G. But last year’s net client inflows (excluding the firm’s Heritage business) of £1.1bn were solid.
While the headline number was good, there is an ongoing risk of outflows in the UK institutional asset management business. That happened last year, although M&G says that it expects market conditions to normalise this year.
For an asset manager, earnings per share can be an unhelpful financial metric, due to changes in asset valuations. Its 28% growth in adjusted operating profit last year was strong. On an IFRS (International Financial Reporting Standards) basis too, things were looking up. A prior year reported loss of £2bn turned into a profit of £0.3bn last year.
Assessing the valuation
The dividend per share grew as it has in recent years. It was very modest growth though, up from 19.6p to 19.7p.
While I appreciate management signalling recognition of the dividend’s importance by growing it, this felt tokenistic to me. Still, it puts the current yield at 8.3%. I find that very attractive.
I think an expectation of success is already built in to the M&G share price, however. It has rallied 28% over the past year.
Is it still a bargain?
From an income perspective, if the company delivers on its strategy of maintaining or growing the annual dividend per share, I think the share price offers good value.
In terms of opportunity for share price growth, for some years I felt the M&G share price reflected a lack of understanding of the business in the City after it was demerged from Prudential in 2019. The past year’s share price growth has put it on what I regard as a more appropriate valuation.
If the business continues to do well though, the share price could yet move higher from here. Between the yield and the potential for share price growth, if I had spare cash to invest following today’s results, I would be happy to add M&G shares to my portfolio.
