FTSE 100 financial services provider M&G (LSE: MNG) remains a core holding in my passive income portfolio.
This comprises stocks that deliver a dividend yield of 7%+, which should allow me to keep reducing my working commitments. Better still, they do so without too much effort on my part beyond picking them initially – hence the ‘passive’ tag.
Another one of the selection criteria I use to choose these shares is that they should be significantly undervalued. This is primarily aimed at reducing the chance of my making a loss on the share price. But it also increases the chance of my making a profit on the share price too.
The major new deal
M&G’s share price was already significantly undervalued according to discounted cash flow (DCF) modelling when I bought the stock. This method shows where any firm’s stock price should be, derived from cash flow projections for the business.
As it stands now, the DCF for the firm shows it is 46% undervalued at its present price of £2.59.
Therefore, its ‘fair value’ is £4.80, implying that the shares could have plenty of room to rise.
I believe a catalyst that may enable its current price to converge with its fair value is a new deal.
Specifically, 30 May saw Japanese financial powerhouse Dai-ichi Life agree to buy a 15% shareholding in M&G. The UK firm expects the partnership to deliver at least $6bn of new business flows for it over the next five years.
This is anticipated to come from a rapid expansion in European private markets and from new customers across Asia.
A risk to the firm is that this partnership falters for some reason.
That said, consensus analysts’ forecasts are that M&G’s earnings will increase a spectacular 41.2% a year to end-2027. And it is growth here that ultimately pushes any firm’s share price – and dividends – higher over time.
What about the dividend yield?
In 2024, M&G paid a dividend of 20.6p, which yields 7.8% on the current share price.
However, analysts forecast that its dividends will increase to 20.6p this year, 21.3p next year, and 22.1p in 2027.
On the current share price, these would generate respective yields of 8%, 8.2%, and 8.5%. By contrast, the average FTSE 100 yield is 3.5%. And the risk-free rate (the UK 10-year government bond yield) is 4.6%.
How much passive income could be made?
Just using the current lower yield, investors considering a £10,000 holding in M&G would make £780 this year in dividends. Over 10 years on the same average rate this would rise to £7,800, and to £23,400 after 30 years.
That said, by using the standard investment practice of ‘dividend compounding’ the returns would be far greater.
Specifically, on the same 7.8% average yield, the dividends would be £11,760, not £7,800. And after 30 years on the same basis they would be £93,029, rather than £23,400.
Adding in the initial £10,000 stake and the total value of the holding would be £103,029 by then. At that point this would be generating £8,036 a year in annual passive income from dividends.
None of this is guaranteed, of course. But given its earnings growth potential and what this means for the share price and dividends I will buy more of the shares very soon.
