As an investor, I always try to remember that no dividend is ever totally secure. Sometimes it seems hard to imagine a company cutting its dividend – but then it does. I owned Shell shares in 2020 when the company suddenly cut its payout for the first time since the war. So, what about M&G (LSE: MNG), a company I now hold in my portfolio? The 8.8% M&G dividend yield is definitively attractive to me. But can it last?
Here are three reasons I think it can – and one risk I see.
Large share buyback
Last March, the company announced a sizeable share buyback programme that it has since completed.
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The company spent half a billion pounds buying back its own shares. That equates to just over 10% of its current market capitalisation.
That does not seem to have boosted the share price, which is just 2% higher than a year ago. But with fewer shares in circulation, the company can afford to pay the same dividend as before, or even a higher one, without it costing as much.
Spending half a billion pounds on a buyback is a sign of strong management confidence. If the firm has enough spare cash to fund such a programme, that increases my confidence in the safety of the dividend.
Dividend policy
On top of that, the company has a dividend policy of maintaining or increasing its annual payout.
That is never guaranteed. But if management fails to deliver on it, shareholders would express their dissatisfaction. That could lead to an executive losing their job.
Management understands the importance of this. In last year’s final results, it emphasised: “We also promised shareholders a stable or increasing dividend policy, and we have kept that promise throughout the pandemic”.
So, if the firm doubts it can maintain the payout in line with the policy, I would expect it to flag a change in the dividend policy, like housebuilder Persimmon did last year.
For now the policy is the policy. I think that suggests management is confident that it can maintain the dividend.
Share price support
Since demerging from Prudential in 2019, M&G has often felt like an unloved child.
Its share price is 7% lower now than it was then, despite the company offering one of the highest yields among FTSE 100 members.
I think that yield helps to support the share price. If the M&G dividend was cut, I would expect many income investors to drop it — and that could see the shares plummet.
That alone makes me think that maintaining the dividend is high on management’s list of priorities.
A risk I see
But dividends need to be funded. Last year, post-tax profit was £92m but paying dividends cost the firm £466m.
Share value fluctuations can mean asset managers see their reported earnings fall even while the underlying business performance is solid. So for now, I am not worried about dividend coverage and plan to keep holding my shares.
But I recognise that the dividend relies on the company successfully navigating risks like choppy markets. They could lead to investors withdrawing funds and profits falling.
I am optimistic that the company can manage such risks. I am actually hoping for a modest dividend increase when the company publishes its final results next week.
