A 9.9% yield but down 14%! This FTSE hidden gem looks a bargain to me

This FTSE investment manager has high growth potential, is undervalued to its peers, and pays a stunning 9.9% yield.

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Shares in FTSE global investment manager M&G (LSE: MNG) are down 14% from their 2 March high this year.

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The drop was part of a broader slide in many of the FTSE 100’s financial sector stocks around that time. This resulted from the failures of Silicon Valley Bank and Credit Suisse, which renewed fears of a new financial crisis.

No new financial crisis emerged, but shares in these UK financial stocks are still marked down.

The advent of a genuine new financial crisis does remain a risk for financial sector shares, of course. Another risk is that inflation and interest rates stay high, acting as a deterrent to new client business.

Nonetheless, I have holdings in three of them — Phoenix Group Holdings, Legal & General, and Aviva. Even with these, I am seriously considering buying M&G for three key reasons.

High growth potential

The company said in its H1 results that it is on track to achieve operating capital generation of £2.5bn by end-2024. This on its own can provide a powerful engine for further growth.

It also said that it is making good progress on its 2025 targets. These include making £200m of savings and increasing operating profit from Asset Management and Wealth to more than 50% of the group total.

Overall, adjusted profits before tax in H1 increased 31% to £390m against the same period last year. Consensus analysts’ expectations were for just £284m.

Analysts’ expectations are now for increases in earnings and earnings per share of 46.9% and 50.2%, respectively, in the coming year.

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

Undervalued to peers

A big drop in a company’s share price is a flag for me that it might be undervalued. But it does not necessarily mean it is – it might just be worth less than it was before.

To get to the truth of the matter, I look at key valuation metrics, such as the price-to-book ratio (P/B).

Currently, M&G’s is 1.2. This is higher than abrdn’s 0.5, and RIT Capital Partners’ 0.7, but lower than Burford Capital’s 1.4, and St. James’s Place’s 2.8. 

Therefore, M&G looks undervalued on this measurement compared to its peer group average of 1.4.

Passive income gem

Last year, M&G paid a total of 19.6p per share. Based on the current share price of £1.98, the yield is 9.9%. This places it in an elite group of FTSE 100 companies paying over 9%.

This return may become even better though, in my view. Its interim dividend this year was 6.5p, compared to last year’s 6.2p. If this increase was applied to the total dividend then this year’s payment would be 20.54p. At the current share price, this would give a yield of 10.4%.

Even if the payout stays the same, a £10,000 investment would make £990 in passive income this year.

Over 10 years, if the yield and share price stayed the same, £9,900 would be added to the initial investment. This does not include gains or losses from share price moves, of course, or any tax incurred.

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 positions in Aviva Plc, Legal & General Group Plc, and Phoenix Group Plc. 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.

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