The FTSE indices are home to a vast array of income stocks offering jaw-dropping yields. And right now, M&G (LSE:MNG) currently offers the biggest payout in the FTSE 100, at 9.5%. In fact, it’s one of the three remaining stocks offering a yield above 9% in this index since Vodafone and Burberry cut their shareholder rewards.
This goes to show that a high yield is far from guaranteed. But there are occasional exceptions to this rule. And if sustained, M&G could be one of the biggest income opportunities for investors right now. So let’s investigate whether it’s time to start buying, or steer clear of this enterprise.
Navigating market turbulence
As a life insurance and asset management firm, M&G’s highly exposed to fluctuations in the financial markets. That includes fixed income as well as the stock market. Based on its latest interim results, the impact of volatile economic conditions is plain to see.
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Customers are pulling their money out. With higher interest rates promising better risk-free returns on cash, the wealth and asset management divisions saw £0.9bn and £0.5bn of capital going out the door respectively. Consequently, adjusted operating profits took a hit, landing at £375m over the first six months of the year versus £390m achieved in the first half of 2023.
That’s obviously not something shareholders want to see. However, at the same time, the stock market rally throughout 2024 offset the entire adverse impact of net outflows. The group’s assets under management & administration (AUMA) are actually £2.6bn higher since the end of 2023, reaching £346.1bn.
Yet management’s strategy of re-entering the bulk purchase annuities market seems to have been poorly timed. M&G’s making good penetration progress with new deals, reducing the risk of its pension schemes. But the pension risk transfer market’s currently booming in the UK, resulting in the firm missing out on growth.
So overall, M&G results seem to have been a bit of a mixed bag. But what does this all mean for dividends?
Is a 9.5% dividend yield here to stay?
Financial institutions are complicated businesses, especially those involved with both insurance and investments. But despite all the murky movements in numbers, management’s outlook remains crystal clear. Operating capital generation guidance for 2024 has increased from £2.5bn to £2.7bn. Meanwhile, leadership also believes it can deliver up to £220m of savings by the end of 2025, instead of the £200m initially expected.
Both of these upgrades are good news for earnings and, in turn, dividends. In fact, shareholder payouts have actually just been hiked from 6.5p per share to 6.6p. It’s a small increase but marks the fourth year of consecutive hikes. And it’s further evidence that management remains confident about sustainability.
The group’s exposure to volatile financial markets likely explains why shares are priced so cheaply. On a forward price-to-earnings basis, the stock trades at a ratio of just 8.5. That’s one of the lowest in the industry and is a dominant driving factor of the high dividend yield.
So if the shares are cheap and dividends are seemingly here to stay, should I invest in this enterprise? Personally, I’m not tempted. The company’s just too complex, especially since there are other FTSE firms providing similar yields with massively simpler business models.
