FTSE 100 global investment manager M&G (LSE: MNG) has now recouped nearly all its losses from March 2023.
These came from fears of a new financial crisis after Silicon Valley Bank and Credit Suisse failed.
A genuine financial crisis does remain a risk for the stock. And there have been concerns from some about its debt level.
It has a debt-to-equity ratio of just over 2. A healthy figure for many companies is regarded as being up to around 1.5.
However, for firms in high-cash-flow businesses — like insurance and investment — anywhere up to 2.5 or so is considered fine.
I believe this risk for M&G is mitigated further by short-term assets (£34.3bn) far outweighing its short-term liabilities (£13.1bn).
Additionally, its H1 2023 results show it should achieve operating capital generation of £2.5bn by end-2024. This huge cash war chest will allow it further leeway in meeting its debt obligations.
It can also provide a powerful engine for further growth. Analysts’ expectations are for earnings and revenue to increase, respectively, by 37.1% and 109.6% a year to the end of 2026.
Earnings per share is expected to grow by 39.3% a year to that point.
A dividend star
For 2022, M&G paid 19.6p a share, which — based on the current £2.26 price — yields 8.7%.
This could well increase, as the interim dividend for 2023 rose to 6.5 from 6.2p in 2022. If this was applied to the total dividend then the payment would be 20.54p. At the current share price, this would give a yield of 9.1%.
Before that, M&G provided a dividend yield of 9.2% in 2021, from an 18.3p payout. The yield was the same in 2020, from an 18.23p payout.
By comparison, the average yield of the FTSE 100 in 2022, 2021, and 2020 was 3.7%, 3.7%, and 3.2%, respectively.
The best bargain in the Footsie?
There are many bargains currently in the FTSE 100. This is partly due to a broad mark-down of UK economic prospects after the Brexit decision in 2016, justified or not. And it is also due to a lack of technology stocks that have powered gains in other global indices.
Overall, the FTSE 100 traded at an average price-to-book (P/B) of around 2 in 2023, and it remains about the same now. This compares to about 4.2 for the S&P 500 in 2023 and around 4.7 now.
For M&G shares, their recovery from March 2023’s mini-financial crisis does not mean they have no value left.
Using the P/B metric, the stock is trading at the bottom of its peer group, at just 1.3.
Man Group is at 2.3, Intermediate Capital Group at 2.6, St. James’s Place at 2.8, and Hargreaves Lansdown at 4.9. This gives a peer group average of 3.2.
A discounted cash flow analysis shows M&G shares to be around 46% undervalued at the current price of £2.26.
Therefore, a fair value would be around £4.19.
The stock may never reach that price, of course. However, it does confirm to me that it looks like one of the best bargains in the FTSE 100.
Given its strong earnings outlook, high yield, and good value share price, I am happy to keep my holding in the company.
