A couple of years ago, I added a brilliant FTSE 100 income share to my Self-Invested Personal Pension (SIPP). Yet at the time, investors didn’t seem to think it was so brilliant.
The shares were struggling, and the yield appeared too good to be true at around 10%. Sky-high rates of income are often a warning sign. Yields are calculated by dividing the dividend per share by the share price. When the share price falls the dividend soars through simple maths. This can also leave the board scrambling to generate enough cash to satisfy investors. if they can’t manage that, and cut the dividend, the shares take a beating too.
M&G’s an ultra-high yielder
M&G (LSE: MNG) had been spun off from FTSE 100 insurer Prudential in 2019 and got off to a stuttering start. It didn’t help that the pandemic struck in early 2020.
But I dived in anyway, tempted by its bargain price-to-earnings (P/E) ratio of around seven. I also noted that the UK financial sector was out of favour generally, and decided this was an opportunity.
Interest rates were still relatively high, meaning savers could get a decent yield from cash and bonds, with minimal risk to their capital. I decided that when rates fell, the M&G dividend would continue to shine. Interest rates didn’t fall as fast as I hoped, yet M&G shares beat my expectations.
Over the last year, the M&G share price has outpaced the FTSE 100 to climb 33%. Throw in the trailing dividend yield of 7.6%, and the total return is more than 40%. Longer-term investors will have done even better, with the shares up 80% over five years, with a total return nearing 125%.
On 3 September, M&G reported a steady first half, with operating profit for tax climbing just £3m to £378m. Adjusted profit after tax gains looked better, switching from a £56m loss to a £248m gain.
FTSE 100 global opportunity
New business flows are strong, and the opportunity stretches beyond the UK, as it now boasts “an established footprint in Europe and growing access to attractive Asian markets”.
The interim dividend was increased, but only by a single penny, to 6.7p. Future growth’s going to be slow, with the board aiming for around 2% a year. Given the bumper yield, I can live with that.
As a £6.25bn company, M&G does have scope to grow. And it still looks good value, with a forward price-to-earnings ratio of 10.6. However, I expect the share price will slow at some point.
There’s a lot of talk about a stock market crash right now. If we get one, M&G will feel the impact, as this will shrink net flows into its funds and reduce the value of assets under management. So that’s one risk to look out for.
Another is it operates in a competitive market. It’s also an active fund manager, battling to win new business at a time when investors favour trackers. But with interest rates potentially easing slightly, I feel my original investment case still holds.
I still think M&G shares are worth considering today, particularly for income-focused investors taking a long-term view. No stock purchase is a total no-brainer but, in my view, this one comes pretty close.
