The first stock suggestion I made to my son when he turned 18 was FTSE 100 investment giant M&G (LSE: MNG).
It had everything I wanted to see in an anchor stock for any well-balanced long-term portfolio. These are huge earnings growth potential, an enormously undervalued price, and a massive yield.
That was back in 2020, but nothing has changed in my view. And M&G would still be my first suggestion to him if he were just starting out on his investment journey.
Does the firm still look solid?
A company’s earnings are what drive its share price and dividend over the long term. Consensus analysts’ forecasts are that M&G’s will grow a whopping 42.4% every year to the end of 2027.
A risk to these is intense competition in its business that could reduce margins. Another is a spike in the cost of living that might prompt customers to withdraw funds from their accounts.
However, the firm’s 2024 results saw total adjusted operating profit before tax rise 5% year on year to £837m. This was way ahead of analysts’ projections for a drop to £769m from 2023’s £797m figure.
Assets under management and administration rose £2bn to £346bn over the period, and the company made £188m in cost savings.
Does the share price still look undervalued?
As a former investment bank trader and longtime private investor I have found the discounted cash flow method is best at determining stock undervaluation.
This identifies the fair value of any firm’s shares, based on future cash flow forecasts for the company.
The DCF in M&G’s case shows its shares are 62% undervalued at their current price of £2.03.
Therefore, their fair value is technically £5.34, although share prices can go down as well as up.
Such an undervaluation increases the chance of my making a profit on the share price alone, in my experience.
How much passive income can be made?
Dividends paid by shares are the best way I have found of generating ‘passive income’ (money made from minimal effort).
Investors considering a holding of £10,000 in 9.9%-yielding M&G would make £990 in first-year dividends.
This would increase over 10 years on the same average yield to £9,900. And after 30 years on the same basis, the dividends would have grown to £29,700. Not that the same average deal is guaranteed.
Regardless, it is crucial to note here that these returns could be far greater if ‘dividend compounding’ were used. This standard investment practice only involves reinvesting dividends paid by a stock back into it.
Using this method a 9.9% yield would increase the dividends to £16,803 after 10 years not £9,900.
On the same basis, the dividends would increase to £182,559 after 30 years rather than £29,700.
Adding in the £10,000 first investment and the M&G holding would be worth £192,559.
So by that point, it could be paying £19,063 a year in passive income.
Should I buy more?
I believe the firm’s exceptionally strong earnings growth will drive the dividends higher over time as well.
Indeed, analysts’ projections are that its dividend will rise to 20.6p in 2025, 21.2p in 2026, and 22.2p in 2027.
These would give respective yields of 10.1%, 10.4%, and 10.9%. Consequently, I will buy more of the stock very soon.
