High dividend yields are the ever-attractive promise of value investing, offering that little bit of extra return. But as many investors learn the hard way, high yields don’t always equate to high returns.
Not only can a company cut dividends whenever it likes, but a falling share price could negate any returns. To ensure long-term reliable growth, it’s important to look beyond the big, shiny yield.
So when I discovered that this FTSE 100 company boasts a huge 9.4% yield, I decided to investigate.
M&G (LSE: MNG) is a global investment management firm based in London. Despite 100+ years in business, it only joined the London Stock Exchange after de-merging from Prudential in 2019. It now operates five main subsidiary brands, M&G Investments, M&G Wealth, M&G Real Estate, Prudential UK, and Infracapital.
Straight off the bat, I’ll point out the biggest risk when choosing investment management stocks. While these stocks can beat the market at times, they also get hit hard when times are tough. Right now the economy is keeping steady but an economic slump could spell trouble. Fortunately, the upcoming election is expected the give the UK stock market a boost, so M&G might benefit from that.
Below average growth
As it was only recently listed there isn’t much historical price info to go on. It has a price-to-earnings (P/E) ratio of 16.8, slightly above the UK Asset Management industry average of 13. And its one-year price growth of 10% is low compared to the industry’s 20%. That’s not great. It suggests the price is still overvalued even after a big drop.
The slow growth is largely due to a 17% price drop in March this year after the firm announced its 2023 results. Despite the mostly positive outcome, investors were spooked by something. It seems a bit odd, considering revenue and earnings have enjoyed year-on-year growth of 362% and 124% respectively.
The fact that there doesn’t appear to be any obvious reason for the erratic price behaviour is even more concerning. Maybe the barely noticeable dividend increase left shareholders feeling hard done by? Who knows.
So, is it worth it?
For now, the price decline means the dividend yield has been inflated. That’s great for shareholders, especially those who bought at a cheaper level than the current price. Even if it continues to underperform, 9.4% annual returns are pretty good.
The share price has traded in a fairly tight range within about 10% of 200p for the past four years. If that continues, the shares may be worth buying just for the dividend alone. For example, if I bought £5,000 worth of the shares and reinvested the dividends for 10 years, it could grow to over £13,400.
While that’s a bit higher than the average I can expect from a FTSE 100 tracker fund, it’s not spectacular enough to grab my interest. Personally, I would need to see more solid evidence of potential price growth before buying the shares. However, if the stock market continues to improve and M&G benefits from it, I may revisit that decision.
The post Does the 9.4% dividend yield justify buying shares in this UK investment giant? appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc and Prudential 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.
