Savings, investment, and insurance company M&G (LSE: MNG) has long been a high-yield star in the FTSE 100.
In its 2022 results, it declared a second interim dividend of 13.4p per share. Added to the first payment of 6.2p, this meant a total payout of 19.6p – giving a 10.4% annual yield.
If such a payout level remained in place for 10 years, an investment in the company now would double over that period.
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And that 100% return would not include the reinvestment of dividends or any share price appreciation that would boost gains.
On the flipside, the return does not include tax applied according to the circumstances of the individual investor.
2022’s very high yield was not a one-off for M&G. In 2021, it paid 18.3p per share, giving a payout of 9.2%, and the same dividend was paid in 2020.
Analyst forecasts are for a payout of at least 19.7p this year. This would give a 9.8% yield, based on the current share price of around £2.01.
Better still is that these shares are now trading at a knockdown price, 12% lower than their 2 March high. To me, that looks like a bargain – even more so, given the solid fundamentals of the company.
Core business is solid
A key reason for M&G’s share price decline from March was fear of another financial crisis, it seems to me. This stemmed from the failures of Silicon Valley Bank and Credit Suisse around that time.
But even then M&G’s finances were very strong. Its 2022 results showed operating capital of £821m, with improved underlying capital generation of £628m.
It also maintained a Shareholder Solvency II coverage ratio of 199%. Coverage of 199% for an investment company is seen as strong protection against insolvency.
According to a company update on 8 June, its Solvency II coverage ratio was up to 200%.
Additionally positive in the update was £1bn of net inflows to its wholesale asset management business in Q1. This was up £0.3bn from Q1 2022.
M&G added that it intends to lower its overall leverage ratio to below 30% and generate £200m of cost savings.
New accounting standard fears overdone
Another factor at play in its share price decline has been the potential impact of new accounting rules on its figures. The same has been true for the share prices of several of the UK’s financial sector companies, particularly insurance businesses.
Specifically, the International Financial Reporting Standard 17 (IFRS 17) Insurance Contracts is the new accounting standard for such contracts. It is being applied to all those that started after 1 January 2023.
However, on 20 July M&G said that IFRS 17 will not change its strategy, solvency position, capital management framework, or dividend policy.
It added that it remains committed to achieving its financial target of generating £2.5bn operating capital over the 2022-2024 period.
The key share price risk for me is that M&G’s investment strategies perform poorly, prompting outflows of client funds.
I already have holdings in the sector but even with these I am sorely tempted to buy M&G now. The yield is terrific — one of the best in the FTSE 100. I also think that the shares will recoup all this year’s losses by the end of this year and extend these gains.
