M&G’s (LSE: MNG) share price was up 5% in early morning trading (19 March) after the company released its 2024 full-year results. Now at around 230p, it’s already up 15% this year and only 6.8% below its all-time high set in June 2021.
This morning’s report included £837m in adjusted operating profit before tax up from £797m in 2023. Capital generation fell slightly to £933m from £996m in 2023 and the total dividend per share was raised to 20.1p from 19.7p.
However, the most notable revelation with today’s results was £1.9bn in net outflows from open business. This is a considerable drop from £1.7bn inflows in 2023.
The outflows were attributed to stubbornly high interest rates that make alternative options such as cash and annuities more attractive.
Looking ahead
Along with today’s announcement, Group CEO Andrea Rossi highlighted the 5% rise in operating profit and noted his ongoing dedication to strengthening the foundations of the business.
“We are today announcing two new targets for 2025-2027: to grow adjusted operating profit before tax on average by 5% or more per annum, and to generate £2.7 billion of operating capital,” he said.
M&G’s a well-known savings and investment firm that demerged from Prudential in 2019 but has operated in some form since 1931. Its products include insurance, pensions and wealth management services. Recently, it began re-exploring the capital-heavy Bulk Annuity market, an improving sector with lots of potential.
However, it may need to weigh up how to allocate the necessary funds without threatening shareholder returns. Lately, it’s been struggling with securing and retaining capital from large institutions. If it continues to suffer further outflows, the resultant losses could threaten its core attraction: dividends.
A powerful income stock
With a 9% yield, the big draw for M&G is its potential for passive income from dividends. It only has a short five-year history of paying dividends but its track record is good. It’s increased its final dividend from 11.92p per share to 20.10p per share in that short time — equating to compound annual growth of 11%.
But there’s one small issue. With basic earnings per share (EPS) at only 7p, its payout ratio’s an eye-watering 276.9%. That means it’s paying out almost three times more than it’s earning.
You don’t need an MBA to know that’s unsustainable.
Additional risks
Aside from the risk of dividend unsustainability, M&G has several other hurdles to overcome. The company’s revenue model relies heavily on assets under management (AUM), which fluctuates with financial markets. In light of the current global unrest, this is a considerable risk to consider.
Similarly, interest rate changes can affect its profitability from fixed-interest investments.
Today’s report highlighted these risks, along with geopolitical uncertainty and market volatility. The company aims to “navigate this uncertain environment by leveraging its balanced and integrated business model“.
All things considered, it seems to be on the right track to improve its market position and building on the existing business. As such, I think it’s a smart stock to consider for income-focused investors. The ability to turn a profit and raise dividends despite outflows suggests strong management and market resilience.
