Investment manager M&G (LSE: MNG) has been a star high-yield FTSE 100 stock since it split from Prudential in 2019. But it hasn’t had an easy ride.
It has struggled to find a consistent house investment style, relying for some time instead on supposed star fund managers. The performance of these stars was mixed at best. It has also struggled with the rise of passive tracker funds or investors just doing it themselves.
Stellar dividend yields
For me, though, these factors have made M&G more attractive. This is because as its share price has struggled so its dividend yield has increased. And M&G dividends were already around the highest of any company in the FTSE 100.
At the end of 2019, the shares had a yield of 5%. At the end of both 2020 and 2021, this had increased to 9.2%. And at the end of 2022, it was 10.4%.
This 2022 figure followed the second interim dividend of 13.4p per share, making a total of 19.6p for the year. It was a 7% year-on-year rise, in line with M&G’s policy of stable or increased dividends every year.
Solid fundamentals
As a UK-based investment company, M&G must maintain very solid financial foundations.
In its 2022 results, it showed generated operating capital of £821m, with improved underlying capital generation of £628m. This is one element of the resilience in its business model.
Another is that it maintained a Shareholder Solvency II coverage ratio of 199%. This ratio measures how well shareholders are protected against a company becoming insolvent. Coverage of 199% for an investment company is regarded as strong.
It’s true that M&G recorded a lower adjusted operating profit in 2022 than in 2021 — £529m against £721m. However, all but £20m of this difference was due to exceptional revaluations in its holdings, including foreign exchange.
New client funds flowing in
Underlying strength was further evidenced by the increases in the flows of funds into M&G in 2022. Its Heritage business (pensions, annuities, life, and savings) saw positive net client flows of £0.3bn. Its Asset Management business returned to net client inflows for the first time since 2018 — of £0.5bn. And £0.2bn of net client inflows went into its Wealth business.
For me, there are two main risks in the shares. The first is a major correction in the global investment environment. From early 2020 to late 2021, we saw this from the unexpected widespread onset of Covid-19. In early 2022, we saw it again with Russia’s unexpected invasion of Ukraine. The global markets have become a more jittery place since then and other shocks could happen at any time.
The second is that M&G fails to deliver on its investment strategies. However, any such failure would likely hasten takeover bids and cause a big rise in the share price.
I already have holdings in the investment management sector and don’t want to increase its weighting in my portfolio. If I didn’t have these, I’d buy M&G shares today for their current and projected dividend yield. I’d also keep them on the possibility of a big rise in price on takeover rumours or reality.
