The FTSE 100’s M&G (LSE: MNG) turned its H1 2024 £56m IFRS loss into a £248m profit in this year’s H1 results, released on 3 September.
The insurer and asset manager also increased its net flows to £2.1bn from a £1.1bn outflow in H1 2024. This was supported by a rise in assets under management (AUM) over the period to £354.6bn from £346.1bn. These rises in turn were underpinned by an increase in international clients’ AUM to 58% of total against 37% five years ago.
Whilst M&G’s Asset Management business has grown, it has reduced its cost-to-income ratio, to 75% from 77%.
In terms of capital safety, the firm’s Solvency II coverage ratio jumped from 210% to 230% year on year. This compares to the 100% minimum requirement for the industry.
As a result of these strong numbers, M&G increased its first interim dividend to 6.7p from 6.6p. This aligns with the new progressive dividend policy announced on 9 March. 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.
The share price outlook
It is a firm’s earnings that ultimately power gains in its share price and dividends over time.
A risk to these in M&G’s case is the intense competition in both the insurance and asset management spaces. Another is any further surge in the cost of living, which may cause investors to withdraw funds and close accounts.
That said, consensus analysts’ forecasts are that M&G’s earnings will grow by a stellar 37.8% each year to end-2027.
Discounted cash flow analysis reflects projected earnings in its modelling of future cash flow forecasts of any firm’s underlying business. It is through these that it pinpoints the price at which any stock should be trading.
In M&G’s case, the DCF shows its shares are 32% undervalued at their current £2.53 price.
Therefore, their fair value is £3.72.
Secondary confirmations of their undervaluation are evidenced in comparative valuations with peers.
For example, M&G’s price-to-sales ratio of 1 is bottom of its competitor group, which averages 4.1. These firms comprise Legal & General at 1.1, Man Group at 1.9, Intermediate Capital Group at 6.7, and Hargreaves Lansdown at 6.9.
What’s the dividend yield outlook?
That said, I regard the key reward in M&G as its dividend yield. And when compounded, this can yield even more generous annual returns.
The firm’s current dividend yield is 7.9%. Without dividend compounding, £11,000 (the average UK savings) M&G will make £8,690 in dividends after 10 years. And after 30 years on the same basis, this would rise to £26,070.
However, with dividend compounding on the same amount and the same yield, there would be £13,175 in dividends, not £8,690. And after 30 years there would be £105,761rather than£26,070.
Including the initial £11,000 investment and the total value of the holding by then would be £116,761. And this would be generating a yearly dividend income by then of £9,224!
That said, analysts forecast that M&G’s yield will rise to 8% this year, 8.2% next year, and 8.4% in 2027.
Given its high dividend yield, undervalued share price, and strong earnings growth potential I will buy more of the stock very soon.
