UK investors were braced for bad news regarding the economy’s descent during lockdown. Even so, the news was worse than many expected. However, the FTSE 100 index is up 100 points (1.6%) as I write.
The worst economic collapse in history
Today, the Office for National Statistics (ONS) revealed that, thanks to a lockdown lasting from March to July, the UK underwent an historic economic contraction.
In the second quarter, UK gross domestic product (GDP, or national output) plunged by more than a fifth (20.4%). This sent the UK tumbling into the deepest depression on record, with the FTSE 100 index following suit.
For the record, this is the worst slump in Europe and twice the contraction seen in the US over this period. Indeed, the worst quarterly fall in UK GDP during the global financial crisis of 2007–09 was a mere 2.1%. It’s also the worst figure by a long way in quarterly data that goes all the way back to 1955.
What’s more, the UK’s coronavirus-driven economic collapse was worse than that in the US, Germany, Italy, France, and even Spain. Yikes.
Good news for FTSE 100 investors
We all knew Q2 would be bad, but the bounce-back has already started. In June, GDP leapt by 8.7% from May. This means UK GDP has risen 11.3% since bottoming out in April.
As the UK economy bounced back from its lows, so too did the FTSE 100 index. Since crashing below 5,000 on 23 March, the FTSE 100 has rebounded hard. Today, it hovers around 6,270, up more than a quarter (25.6%) from its 2020 low.
I see this FTSE 100 as safe, solid, and solvent
The bad news for M&G – only a recent entrant to the FTSE 100 – is that pre-tax profits (PTP) collapsed by almost three-fifths. In the first half of 2020, profits dived to £309m, down 56.7% year on year. However, stripping out £157m of demerger costs and market volatility caused by Covid-19, M&G’s IFRS after-tax profit was a healthy £826m (2019: £795m).
Another setback for M&G was a decline in assets under management to £339 billion, £2bn lower than for H1/19. Likewise, the FTSE 100 firm’s ‘Shareholder Solvency II coverage ratio’ – a measure of its balance-sheet strength – fell to 164% (from 176% at end-2019).
I still see M&G as crazily cheap
Given we’ve just come through the FTSE 100’s steepest-ever decline, I think M&G has done rather well in an extremely difficult environment.
Also, M&G has declared an interim cash dividend of 6p a share, while the full-year payout could be 12p or more. Also, the FTSE 100 firm plans to generate excess capital of at least £2.2bn over three years. This alone is almost half M&G’s current market value of £4.51bn.
As I write, M&G shares trade at 177.8p, up 4.15p (2.4%) on today’s news. They peaked at 245.9p on 19 February and, a month later, closed at 84.12p on 18 March. This tells me that M&G shares are often mispriced, relative to its underlying value.
Right now, M&G shares trade on a price-to-earnings ratio of 4.25, for an earnings yield of 23.5%. They also offer a bumper dividend yield of 6.86%. For me, this is crazily cheap for a FTSE 100 share, so I’d buy and hold M&G today for juicy dividends and capital payouts!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.