A 9.9% yield but down 17%! Is this FTSE dividend superstar also its best bargain right now?

This FTSE stock pays a very high dividend yield, looks very undervalued to me, and seems set for strong growth.

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FTSE investment manager M&G (LSE: MNG) has lost around 17% of its value since its 12-month 21 March traded high. 

Even before this, it looked one of the best bargains to me in any of the FTSE’s major indexes.

There are risks in the firm, of course. One is a new global financial crisis. Another is its relatively high debt-to-equity ratio of around 1.9.

However, crucially to me as well is that it also pays one of the highest dividend yields in these indexes. And such high payments look well-supported by strong business growth, in my view.

How much of a bargain is it?

On the key price-to-book (P/B) stock valuation measurement, the investment manager currently trades at just 1.2. This is by far the lowest of all its peers, the average P/B of which is 3.2.

To ascertain how much of a bargain it is, I used a standard discounted cash flow analysis. This shows M&G shares to be around 49% undervalued against its peers.  

So, with the shares currently at £2, a fair value would be about £3.92.

There is no guarantee that they will ever reach that price. But it underlines to me that the stock is one of the best bargains in any FTSE index right now.

A top dividend payer

M&G paid a total dividend of 19.7p a share in 2023. On the present share price, this gives a yield of 9.9%. This puts it among just a handful of companies in any FTSE index paying over 9%.

So, if I invested £10,000 now in M&G, I would make an additional £990 in dividend payments this year. After 10 years on the same yield, I would have another £9,900.

However, if I reinvested the dividends paid me back into the stock, I would have a lot more than that.

Specifically by doing this — a method known as ‘dividend compounding’ — I would have made another £16,803 after 10 years instead.

This is the same process as reinvesting interest in a bank account, but rather than interest being reinvested, dividends are.

After 30 years of doing this with an average 9.9% yield, I’d have £192,559. This would pay me £18,079 a year in dividends or £1,507 a month!

Are the high dividends sustainable?

Earnings and profits drive dividend payments over time. If these key drivers decline, the likelihood is that dividends will fall too.

Conversely, if they rise, then high dividends should be sustained and even increase as well.

Consensus analysts’ forecasts are for M&G’s earnings to grow at 19% a year to the end of 2026. Earnings per share are expected to increase by the same level to that point. And return on equity is forecast to be 16.2% by then.

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.

Given its high yield and growth prospects, I will be buying more M&G shares very shortly.

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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