9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain?

This leading British enterprise looks like a delicious deal for passive income, trading at a low multiple while offering a near-double-digit dividend yield!

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Happy couple showing relief at news

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK’s flagship index is home to a wide range of dividend-paying enterprises offering impressive yields. While the index, overall, currently has an average payout of 3.6%, 35 companies are actually paying more than this. And among the most generous stands M&G (LSE:MNG), with a chunky 9.9% yield.

Seeing such a high payout can be a red flag. After all, these are usually created by a sudden drop in share price following some disappointing results. Yet, this doesn’t seem to be the case with M&G. Over the last 12 months, the stock’s basically flat, meanwhile, management continues to hike dividends. So is this a terrific bargain for income-seeking investors?

Getting things back on track

As a life insurance and asset management enterprise, M&G has been on a bit of a roller coaster ride throughout the shifting economic landscape. Management has been busy optimising the firm and pursuing opportunities to improve efficiency and margins. And the strategy appears to be working since the group is on track to deliver £200m of annualised savings by 2025.

Should you invest £1,000 in AstraZeneca right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if AstraZeneca made the list?

See the 6 stocks

Higher rates from the Bank of England have sparked renewed interest in the firm’s annuity products. And with the stock market starting to recover from the 2022 correction, the firm enjoyed a steady influx of fresh capital from customers. As such, the total assets under administration at the end of 2023 increased to £343.5bn versus £342bn in 2022.

What’s more, this figure could be set to rise even higher this year, M&G has re-entered the bulk purchase annuity market for the first time since 2016. And this move is expected to deliver an extra £1bn to £1.5bn in annual sales moving forward.

Overall, management appears confident in hitting its £2.5bn operating capital generation target by the end of this year. And with seemingly no immediate plans to cut back on dividends, the business certainly looks attractive as an income opportunity.

What to watch

The mini-budget in September 2022 continues to create headwinds for institutional M&G customers. In fact, management reported that another £0.7bn of capital outflows occurred throughout 2023 as a consequence of this ill-conceived policy.

Another point of contention is the company’s Solvency II leverage ratio. In oversimplified terms, Solvency II assets are kept on the balance sheet for the specific purpose of absorbing losses. Some examples include retained earnings, paid-in capital, and long-term debt. The leverage ratio compares these liquid assets to the value of the firm’s subordinated debt. In short, the lower, the better.

Management’s targeting to get this metric below 30% by 2025, improving the group’s financial health. For reference, it’s currently sitting near 35%. To hit this target, the group’s outlined a £450m deleveraging plan, which involves redeeming some of its outstanding loans early along with some tender offers.

However, by executing this strategy, M&G is putting temporary pressure on its coverage ratios. At the end of March, coverage stood at 203%. But following this deleveraging plan, it could fall to as low as 160% by management’s own estimates. That’s certainly not terrible. But it increases short-term risk if economic conditions take another turn for the worse.

All things considered, I think there are other high-yield opportunities available today that come with lower-risk exposure. Therefore, despite the generous payout, I’m keeping M&G on my watchlist for now.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Zaven Boyrazian has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »