Shares in insurance group Prudential (LSE: PRU) fell by about 10% when markets opened this morning. The drop was triggered by the group’s long-awaited split, which has seen its UK asset management division M&G (LSE: MNG) spun out into a new listed company.
In this article I’ll explain what this means for existing shareholders and new buyers, and give my verdict on both halves of this venerable business.
How the split works
If you owned Prudential shares at the close of business on 18 October, you will receive one M&G share for each PRU share you own. You’ll then be free to sell or keep either stock, according to your preference.
This allows investors to choose whether they want to be exposed to Prudential’s Asian and US insurance businesses, or M&G’s UK-based asset management operation. Both companies are expected to remain in the FTSE 100.
Broadly speaking, Prudential is expected to be the faster-growing business, as market penetration of insurance in Asian markets is still quite low, providing plenty of growth potential. On the other hand, M&G is expected to provide a much higher dividend yield, as I’ll explain shortly.
What about dividends?
Prudential expects to pay dividends totalling 51.8p per share this year, giving the stock a forecast yield of 3.7%. Future years’ payments will be based on earnings growth and cash generation, so an increase next year isn’t guaranteed. However, I’d expect the payout to remain at a similar level and to return to growth in future years.
M&G is expected to be a much higher-yielding stock. In a presentation to analysts at the end of September, the company said that it expects to pay a final dividend of £310m this year. This would be equivalent to a full-year dividend (interim + final) of about £465m.
I’ve crunched the numbers and from what I can see, this gives M&G stock a theoretical dividend yield of about 8.1%. That may seem high, but it’s consistent with rival firms such as Standard Life Aberdeen and does look affordable to me.
M&G vs Prudential: which should you buy?
I’ll start by saying that if I was an existing Prudential shareholder, I’d probably choose to keep hold of both stocks for now. After all, by doing this, my original investment would be unchanged.
Growth: For buyers who are more interested in growth, I would choose Prudential. In Asia, the market penetration of products such as life insurance is still relatively low. This should provide good growth potential.
In the US, the Pru says that the number of workers with final salary pensions has fallen by 73% since 1985. When combined with an ageing population, this looks like a good opportunity to sell more retirement products.
Income: Investors with a focus on income might want to consider M&G instead. I’ve already mentioned the group’s high dividend yield, which I estimate at about 8%.
Although M&G boss John Foley is keen to talk up the group’s growth prospects — including a planned push into Asia — I believe the fund manager is likely to be a slower-growing business than its former parent.
Ultimately, the choice is yours. We don’t yet know exactly how well each business will perform on its own. But based on what we know today, I’d be happy to own either — or both — stocks.
