Already this month I have added a well-known FTSE 100 share to my portfolio.
It has fallen around 15% since the second half of March. That decline means it now offers a dividend yield of 9.7%, among other attractions for me.
Strong business, good position
The company in question is asset manager M&G (LSE: MNG).
The share has tumbled in recent weeks and its long-term performance has also been weak. Since its 2019 listing (when it demerged from Prudential), the shares are down 10%.
Part of the reason for the recent fall was the share going ex-dividend. That is the cut-off date after which new buyers will not earn a given dividend. As the company’s final dividend was sizeable, it is not surprising that the FTSE 100 share fell after it went ex-dividend.
Still, that alone does not explain a 15% fall in a matter of weeks.
Why is the share cheap?
I see M&G as a cheap share, but not everyone would agree.
One of the challenges with valuing a financial services company is that simply looking at its profit and loss account can give only a limited picture.
Moves in asset prices can affect the bottom line (a company’s earnings). But given that M&G rounded out last year with £344bn of assets under management and administration, such swings in asset valuations do not necessarily reflect the underlying health of the business.
The company is on course to achieve operating capital generation of £2.5bn over a three-year period including this year. Yet the FSTE 100 business has a market capitalisation slightly less than twice that. I think that looks like good value for a business of this calibre, with a customer base in the millions and a well-known brand.
However, M&G seems never really to have excited the City since the demerger. The share price has ultimately been moving downwards despite ups and downs along the way. I think its inconsistent earnings track record helps explain that.
Another risk has been client outflows, leading to smaller fees for the firm. I see that as an ongoing risk, so was pleased that last year the firm managed an inflow of £1.1bn of money to its funds, excluding the Heritage business.
Why I bought
As a long-term investor, I am fairly upbeat about the prospects for M&G despite such risks.
I expect demand for asset management to remain high. The large sums involved mean even small fees can soon add up, making for an attractive business model.
With its long experience, large customer base, and strong brand, I think M&G is well-positioned to keep doing well.
The shares look like offering good value to me and one of the highest dividend yields in the FTSE 100 also appeals to me.
The firm’s policy is to maintain or raise the dividend annually. Whether it delivers on that remains to be seen, but if it does then my investment this month could actually end up yielding even more than 9.7% in coming years.
