M&G (LSE: MNG) is one of the FTSE 100’s most compelling income shares, in my view. Its dividend yield is already one of the index’s highest, and its price looks extremely undervalued. Moreover, strong earnings growth forecasts look set to drive both even higher.
That combination of income today and capital gains tomorrow makes M&G a rare dual‑engine investment, in my book. But how much of this opportunity is the market still overlooking?
Powerful earnings growth driver
The engine for any firm’s share price and dividends is growth in earnings. A risk to investment manager M&G’s is a prolonged downturn in equity or bond markets. This could reduce assets under management, fee income and, ultimately, earnings.
That said, consensus analysts’ forecasts are that its earnings will grow by a standout 34% a year to end-2027. This looks well supported by recent results that showed solid momentum across both revenues and profits.
Its H1 numbers released on 3 September showed adjusted operating profit before tax (PBT) rose to £378m. Meanwhile, net flows jumped 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. While M&G’s Asset Management business grew, it cut its cost-to-income ratio to 75% from 77%.
These positive elements were also seen in its 2024 results published on 19 March. Adjusted operating PBT jumped 5% year on year to £837m, reflecting a 19% increase from its Asset Management division.
The firm also shifted to a progressive dividend policy, under which payouts are expected to rise at least in line with earnings per share. If earnings fall, the dividend will not be reduced.
What’s it mean for the share price?
A share’s price rarely reflects its value accurately – in fact, it can be way off. The reason is that price is whatever the market will pay, while value reflects the underlying business’s fundamentals.
Therefore, the gap between price and value is often where investors can make big long-term capital gains. This is because asset prices generally move to their ‘fair value’ over time.
The discounted cash flow model pinpoints the price at which any stock should trade, based on cash flow forecasts for the underlying business. These also reflect earnings growth, among other factors.
In M&G’s case, it shows the shares are 56% undervalued at their current £2.77 price. Therefore, their fair value is £6.30.
How much income can it generate?
The firm’s 2024 dividend was 20.1p, giving a current yield of 7.3%, more than double the FTSE 100 average of 3.1%. Based on rising earnings, analysts forecast this will go higher — specifically, 7.8% next year and 8.1% in 2027.
Of course, dividend yields can change over time, along with share price fluctuations and annual dividend payments. However, using the current 7.3% return only, my £20,000 holding in the firm would produce £21,410 in dividends after 10 years. This includes reinvesting the dividends (dividend compounding).
After 30 years, this would rise to £157,523, when the value of my holding would be £177,523. And this would generate a yearly dividend income of £12,959.
Given this, its undervalued share price, and strong earnings growth prospects, I will buy more of the stock very soon.
