With a 6% dividend, is this company a passive income no-brainer?

Dividend paying companies can be a game changer for building a passive income, but is this company the answer? Gordon Best takes a closer look.

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When it comes to passive income investing, high dividend yields can certainly catch the eye of income-hungry investors. Man Group (LSE:EMG), a global investment management firm, is currently offering a juicy 6% dividend yield. But is this FTSE 250 company a no-brainer? Let’s dive into the details and see if this opportunity is as good as it looks on the surface.

A financial giant

First, let’s talk about what the firm does. As one of the world’s largest alternative investment managers, the company offers a range of quantitative and discretionary investment strategies. With a market cap of £2.5bn and over £108bn in assets under management, this is no small fry in the financial world.

Now, onto the numbers that matter. Interestingly, a discounted cash flow (DCF) calculation suggests the current price is about 64.5% below an estimate of fair value. Although such an estimate is far from guaranteed, it’s a pretty big indicator that there’s a lot of value here if management can make a success of the next few years. Moreover, annual earnings are forecast to grow by 15.62% for the next three years.

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To me, looking at the competition is always critical when seeing a company or sector trading so far below what the numbers suggest is a fair valuation. The company’s price-to-earnings (P/E) ratio stands at a modest 9.9 times, which is relatively low compared to the average of competitors, which stands at 17.6 times.

The dividend

But what about that tempting 6% dividend yield? It’s certainly attractive in today’s uncertain economic environment. However, I always feel that it’s crucial to look beyond the headline number.

I’d say it’s more important to note the fairly unstable dividend track record in the past. This is something income-focused investors should generally keep in mind, as consistency is often prized when it comes to dividend payments. With the dividend forecast to rise as high as 7.5% by 2026, any change in strategy could disappoint the market.

Plenty of risk

The business operates in a notoriously volatile industry, where performance can swing wildly based on market conditions. The company’s revenue and profits have shown significant fluctuations in recent years, which could impact dividend stability. Moreover, the firm’s fortunes are closely tied to its ability to attract and retain investor capital — a challenging task in an increasingly competitive landscape.

The firm’s global footprint, while providing diversification, also exposes it to currency fluctuations and varied regulatory environments. Additionally, as with any investment firm, there’s always the risk of reputational damage from poor fund performance or potential scandals, which could lead to investors moving elsewhere.

Not for me

So, is this a passive income no-brainer? Well, like most things, it’s not that simple. As many sectors in the market have soared in the last year, the shares have fallen by 1.1%.

Clearly, the company comes with complexities that demand careful consideration. So this isn’t quite the ‘set it and forget it’ passive income stream that some investors might be seeking. I think there are better opportunities out there, so I won’t be investing at present.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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