High dividend yields are the ever-attractive promise of value investing, offering that little bit of extra return. But as many investors learn the hard way, high yields don’t always equate to high returns.
Not only can a company cut dividends whenever it likes, but a falling share price could negate any returns. To ensure long-term reliable growth, it’s important to look beyond the big, shiny yield.
So when I discovered that this FTSE 100 company boasts a huge 9.4% yield, I decided to investigate.
Should you invest £1,000 in Gsk right now?
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M&G (LSE: MNG) is a global investment management firm based in London. Despite 100+ years in business, it only joined the London Stock Exchange after de-merging from Prudential in 2019. It now operates five main subsidiary brands, M&G Investments, M&G Wealth, M&G Real Estate, Prudential UK, and Infracapital.
Straight off the bat, I’ll point out the biggest risk when choosing investment management stocks. While these stocks can beat the market at times, they also get hit hard when times are tough. Right now the economy is keeping steady but an economic slump could spell trouble. Fortunately, the upcoming election is expected the give the UK stock market a boost, so M&G might benefit from that.
Below average growth
As it was only recently listed there isn’t much historical price info to go on. It has a price-to-earnings (P/E) ratio of 16.8, slightly above the UK Asset Management industry average of 13. And its one-year price growth of 10% is low compared to the industry’s 20%. That’s not great. It suggests the price is still overvalued even after a big drop.
The slow growth is largely due to a 17% price drop in March this year after the firm announced its 2023 results. Despite the mostly positive outcome, investors were spooked by something. It seems a bit odd, considering revenue and earnings have enjoyed year-on-year growth of 362% and 124% respectively.
The fact that there doesn’t appear to be any obvious reason for the erratic price behaviour is even more concerning. Maybe the barely noticeable dividend increase left shareholders feeling hard done by? Who knows.
So, is it worth it?
For now, the price decline means the dividend yield has been inflated. That’s great for shareholders, especially those who bought at a cheaper level than the current price. Even if it continues to underperform, 9.4% annual returns are pretty good.
The share price has traded in a fairly tight range within about 10% of 200p for the past four years. If that continues, the shares may be worth buying just for the dividend alone. For example, if I bought £5,000 worth of the shares and reinvested the dividends for 10 years, it could grow to over £13,400.
While that’s a bit higher than the average I can expect from a FTSE 100 tracker fund, it’s not spectacular enough to grab my interest. Personally, I would need to see more solid evidence of potential price growth before buying the shares. However, if the stock market continues to improve and M&G benefits from it, I may revisit that decision.
