Normally, when I see a FTSE 100 dividend share offering a double-digit yield, I step away. This is because I can’t believe it’s sustainable. Yet I may have found an exception to that rule.
The yield in question hails from wealth manager M&G (LSE: MNG), which I purchased on 20 March and again on 12 July. On both occasions, I was taking advantage of a FTSE 100 dip that had dragged down its share price too.
I’m up slightly on both trades, but it’s the dividend I’m after here, because it’s the highest on the index. But is it really safe?
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Too good to be true?
M&G was only hived off from FTSE 100 insurer Prudential in October 2019. But as my table shows, it does have a short but solid record of dividend growth, despite the pandemic. Its earnings per share has been much more volatile though. Last year, it turned negative. That worries me, but also shows the board is committed to rewarding shareholders.
| 2019 | 2020 | 2021 | 2022 | |
| Dividend per share | 11.92p | 18.23p | 18.3p | 19.6p |
| Earnings per share | 40.9p | 44.4p | 3.3p | -66p |
M&G’s 2022 results are skewed by a shift to IFRS accounting measures, which showed a £1.62bn loss after tax, compared to a 2021 profit of £92m. This was down to non-cash losses in the fair value of the surplus assets in its annuity portfolio and derivatives used to hedge the Solvency II balance sheet, triggered by increasing yields.
It shouldn’t affect the dividend with management keen to reassure investors by saying: “Importantly, our dividend payment capacity is linked to the value of available capital in our subsidiaries which is strong”.
Encouragingly, M&G is on track to generate £2.5bn of operating capital by 2024. It also aims to generate £200m of cost savings.
In another positive move, the board still returned nearly £1bn to shareholders through dividends and share buy-backs last year. Even after that largesse it still boasted a “strong” Shareholder Solvency II coverage ratio of 199%.
Another benefit of the buyback is that by shrinking the number of shares on the market it makes the dividend per share more affordable.
The share price may struggle
Markets remain optimistic about the dividend outlook, predicting the shares will yield 10.3% in 2023 and 10.4% in 2024.
Q1 has started well with group CEO Andrea Rossi saying that M&G is building on its “strong momentum” from 2022 with net institutional client inflows of £1bn. It’s also expanding in Europe, winning large mandates in the Netherlands and Switzerland.
That sky-high yield is partly down to an underperforming share price. M&G floated at 214p in 2019 and trades at around 190p today. Over the last year, the share price has fallen 10.1%. It trades at 10.9 times earnings today, which I think is a good entry point with some downside protection.
I expect the share price to remain volatile. As a wealth manager, M&G is affected by wider stock market performance, which looks set to be bumpy as inflation proves sticky and China flirts with deflation.
As long as the dividend comes through – and I think it will – that doesn’t bother me too much. I’m looking to hold this top income stock for years and will wait for brighter times. If it dips, I’ll buy more.
