A share’s dividend yield falls as its price rises and the FTSE 100’s M&G (LSE: MNG) has dropped substantially since August. However, its 20.1p 2024 dividend still generates a yield of 7.9% — one of the highest in any FTSE index. By comparison, the current average FTSE 100 dividend yield is 3.4% and the FTSE 250’s is 3.3%.
Crucially for me, M&G’s 2024 results released on 19 March saw it move to a progressive dividend policy. This is where a dividend is expected to rise at least in line with increases in earnings per share. However, if those earnings fall, the dividend will not be reduced.
Moreover, consensus analysts’ forecasts are that the asset manager’s dividend yield will increase to 20.6p this year, 21.3p next year, and 22p in 2027.
This would give respective yields on the current share price of 8%, 8.3%, and 8.6%.
What’s this mean for dividend income?
Investors considering a £11,000 stake (the average UK savings amount) in 8.6%-yielding M&G would make £946 in dividends in the first year. Over 10 years, this would rise to £9,460, and over 30 years to £28,380.
This is much better than any UK bank savings account, of course, but it could be even more.
If the dividends paid were simply reinvested back into the stock – ‘dividend compounding’ – then these payouts would effectively be turbocharged.
Doing this on the same average 8.6% yield would generate £14,915 in dividends, not £9,460, after 10 years. And after 30 years, this would rise to £132,839 rather than £28,380.
Including the initial £11,000, the M&G holding worth be worth £143,839 by that point. And this would be paying £12,370 a year in dividend income by then. Of course, none of this is guaranteed in the way that a cash savings account is.
Share price gains potential too
It is ultimately any company’s earnings that drive its dividends higher over time. And they do the same for its share price as well.
A risk to M&G’s is any further surge in the cost of living that might cause customers to withdraw funds.
However, consensus analysts’ forecasts are that its earnings will grow by a stellar 41.2% every year to end-2027.
Moreover, its share price already looks extremely undervalued, even without this earnings-growth boost. Specifically, a discounted cash flow analysis shows the stock is 48% undervalued at its current £2.56 price.
This modelling pinpoints where any firm’s share price should trade, based on cash flow forecasts for the underlying business. And these cash flows reflect earnings growth forecasts, of course.
Therefore, the fair value for M&G shares is £4.92.
So is now the right time for me to buy more?
In my experience as a former senior investment bank trader, asset prices tend to converge to their fair value.
I also believe that the upwards revaluation of M&G began recently and will continue. The catalyst for this in my view was the 30 May deal with Dai-ichi Life.This saw the Japanese financial powerhouse agree to buy a 15% shareholding in M&G.
The UK firm expects the partnership to deliver at least $6bn (£4.44bn) of new business over the next five years. This is expected to come from a rapid expansion in European private markets and from new customers across Asia.
Consequently, I will buy more of the shares very soon.
