I sold my shares in Lloyds (LSE: LLOY) recently and have invested some of the proceeds in M&G (LSE: MNG). This will increase my stake in the global investment manager, which I prefer over the bank for three key reasons.
Growth prospects
Lloyds’ 2023 results showed statutory profit after tax increased 41% — to £5.5bn from £3.9bn in 2022.
However, much of this jump in profitability came from a high net interest margin (NIM). This is the difference between the interest it receives on loans and the rate it pays for deposits.
Market expectations are that UK interest rates will fall from here. This is a key risk for Lloyds, as it will cut its NIM dramatically over time, and its earnings with it.
Another major risk is possible legal action for mis-selling car loans through its Black Horse insurance operation.
Overall, consensus analysts’ forecasts are for Lloyds earnings to decline at 0.3% a year to the end of 2026.
Conversely, M&G is forecast to see its earnings increase by 20% a year over that period.
These figures look well-supported to me by its 2023 results. They showed a 28% rise in adjusted operating profit from 2022 — to £797m.
They also saw a 21% year-on-year rise in its operating capital generation last year – to £996m. It looks a solid basis to achieve its £2.5bn three-year operating capital generation target by the end of this year. This can be a major engine for growth.
There are risks for the investment firm as well, of course. One is a new global financial crisis. Another is its relatively high debt-to-equity ratio of around 1.9.
Nonetheless, a clear win in this category for M&G, in my view.
Share valuation
Lloyds’ price-to-book (P/B) ratio is 0.7, against its peer group average of 0.6. So, it looks slightly overvalued on this measurement.
M&G’s P/B is 1.2, against a peer group average of 3.1 Therefore, it looks very undervalued.
To work out how much, I used the discounted cash flow (DCF) model. This showed the stock to be around 49% undervalued at its present price of £2.01.
So, a fair value would be around £3.94, although this doesn’t guarantee it will ever reach that level.
Another big win for M&G in this category too.
Dividend yield
In 2023, Lloyds paid 2.76p per share in dividends. With the share price at 51p now, this gives a yield of 5.4%.
M&G paid a total dividend of 19.7p a share last year. This gives a yield on the current £2.00 share price of 9.8%.
This difference in yield on the passive income I could make over time is massive. It’s even more if I reinvested the dividends paid me – known as ‘dividend compounding’.
On this basis, if Lloyds yield averaged the same over 30 years, a £10,000 investment would grow into £50,348. This would pay me £2,641 a year, or £220 a month.
On the same provisos, £10,000 invested in M&G would increase to £186,913, paying £17,381 a year, or £1,448 a month!
So, a huge win for M&G here as well, making three convincing wins out of three in these categories.
Consequently, my decision to use some of the proceeds of my Lloyds sale to buy more M&G looks well-justified in my view.
