A 9.5% yield now from this undervalued FTSE passive income star!

This FTSE 100 firm posted good H1 results, looks undervalued to its peers, and has a 9.5% yield to generate big passive income streams.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 contains many stocks with a sufficient yield to generate significant passive income. Yet there are very few that pay over 9%. However, global investment manager M&G (LSE: MNG) is one of the few.

And until its share price spiked on better-than-expected H1 results, it even yielded over the magic 10% level. This rate allows investors to double their initial investment if it is sustained for 10 years.  

My starting point in selecting companies for consideration in my high-yield portfolio is naturally enough the dividend. But there are two other factors I look at before as stock makes the cut.

The first is how the core business looks. The second is the share valuation, as I do not want my dividend returns wiped out by stock losses.

These are always possible in any company and there are risks in this one as well, of course. The ongoing cost-of-living crisis may affect client inflows, for example. And there may be another financial crisis at some point, which might make trading profits more difficult to generate.

Share valuation

M&G’s shares are still down around 10% from their high this year, despite the recent bounce on good H1 results.

This does not mean that the firm is undervalued though. It may simply be that the business itself is just worth less now than it was before.

To get a better idea of its true value, I compared its price-to-book ratio (P/B) with those of its peers.

M&G currently trades at a P/B of 1.2. This is lower than all its immediate peers except one — RIT Capital Partners at 0.8. Burford Capital trades at 1.6, Curtis Banks Group at 3.3, and St. James’s Place at 3.6. 

These figures strongly suggest to me that M&G is significantly undervalued compared to its peers.

Core business

H1 results showed adjusted profits before tax increased 31% to £390m against the same period last year. This compared to consensus analysts’ expectations of just £284m.

Operating capital generation also rose over the same period — by 17% to £505m. This means that the company remains on track to generate its target £2.5bn in operating capital by December 2024.

Additionally positive for me is that its Shareholder Solvency II coverage ratio remained strong, at 199%. A ratio of 100% is the regulatory minimum for the industry.

Passive income

In its full-year 2022 results, it declared a total dividend of 19.6p. On the current share price of £2.07, this gives a yield of 9.5%.

If this remained over 10 years, then a £10,000 investment now would make £950 per year in passive income.

At the end of that period, an investor would have made an additional £9,500 to add to their initial £10,000.

This return would not include further gains from any reinvestment of dividends or share price appreciation. Conversely, there would also be tax liabilities, of course, and perhaps share price losses to factor into the net return.

I already have holdings in the sector. But even with these, I am seriously thinking about buying M&G shares. I believe the losses in the share price are unwarranted and will be reversed over time. I also expect it to stick to its history of very high yields.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Burford Capital and M&g Plc. 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.

More on Investing Articles

Bearded man writing on notepad in front of computer
Investing Articles

Could a 2025 penny share takeover boom herald big profits for investors?

When penny share owners get caught up in a takeover battle, what might happen? Christopher Ruane looks at some potential…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »