Should I buy more of this FTSE 100 dividend gem after stellar 2023 results?

This FTSE 100 high-yield stock has risen on stellar 2023 results, but it still looks undervalued against its peers and seems set for strong growth.

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FTSE 100 global investment manager M&G (LSE: MNG) is at its highest level since 10 August 2021.

This followed the release of 2023 results showing a 28% rise in adjusted operating profit from 2022 – to £797m.

Already one of the few FTSE 100 companies to pay dividends yielding over 8%, it raised its payout again. The 2023 total dividend of 19.7p a share gives a yield on the current £2.37 share price of 8.3%.

Given this price spike, some investors might think the stock too expensive now for them to buy. Others may believe they’ll miss out if they don’t jump on the bandwagon regardless of the price.

In my experience as a former investment bank trader and now as a retail investor, neither view is beneficial. The only question worth asking in my opinion is: does the stock still have value?

Business poised for greater growth?

A big potential growth driver for the company is its huge operating capital generation. Last year, this increased 21% year on year to £996m, making a total of £1.8bn over 2022 and 2023.

This should allow it to achieve its £2.5bn three-year operating capital generation target by the end of this year. It has also enabled it to increase its Shareholder Solvency II coverage ratio to 203% from 199% in 2022. A ratio of 100% is the industry’s regulatory standard.

Both factors go some way to mitigating the risks in the stock, in my view. But risk remain. One is a new global financial crisis. Another is its relatively high debt-to-equity ratio of around 1.9.

That said, for high-cash-flow-generating firms such as insurance and investment companies, a ratio of up to 2.5 is considered fine.

M&G also expects to generate £1bn-£1.5bn of additional sales each year from the booming bulk annuity market it re-entered in 2023. This is where companies provide insurance for other firms’ final salary pension schemes.

Overall, analysts’ expectations are that its annual earnings will grow at 19.5% a year to end-2026.

Undervalued shares?

M&G currently trades on the key price-to-book (P/B) stock valuation measurement at 1.4. This is the lowest of all its peers, the average P/B of which is 3.1. So, on this key stock metric, it looks very undervalued to me, despite its recent price rise.

discounted cash flow analysis shows M&G shares to be around 43% undervalued at the current price of £2.37. Therefore, a fair value would be around £4.16.

This doesn’t necessarily mean the stock will ever reach that price. But it confirms to me that it looks very undervalued against its competitors.

Big passive income generator

Some £10,000 invested now at an 8.3% yield would pay me £830 this year. If I reinvested the dividends, I’d have an accumulated investment of £22,868 after 10 years, provided the yield averaged 8.3%. This would pay me £1,815 a year in dividends, or £151 a month.

After 30 years, on the same proviso, I’d have £119,583 in total, paying me £9,493 a year in dividends, or £791 every month!

I will be buying more M&G shares very shortly for its high yield, growth prospects, and hopefully further share price rises in my view.

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 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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