M&G’s half-year figures released last week underscored the group’s place as an attractive FTSE 100 dividend play yielding 5.7%, even after shares rallied more than 30% over the past year.
The savings and investment group lifted its interim dividend to 6.8p and posted its strongest first-half operating profit since listing in 2019. And did so while shifting further towards capital-light earnings that make the payout look durable.
Dividend increase
The interim dividend increased to 6.8p from 6.7p a year ago. This is arguably a modest uptick, but one set at one-third of the prior year’s total distribution under M&G’s progressive policy.
Although shares have embarked on a strong rally over the past year, M&G remains one of the highest-yielding FTSE 100 stocks, with many of its income-paying peers also seeing their share prices rise as investors sought defensive income-bearing stocks.
But with shares trading at around 12x earnings, M&G hasn’t run away on a valuation basis and still offers a sensible multiple for investors conscious of paying too much for stocks no matter the yield.
Barclays analysts modestly upgraded their price target on the back of results and maintain an overweight rating on the stock.
Performance behind the payout
Recent earnings help underpin the case for M&G. Adjusted operating profit rose 15% to £435m, the best first half since listing, with capital-light businesses now generating 80% of the total. Asset management is the powerhouse for M&G, with operating profit up 24% to £159m, driven by higher recurring revenues and £2.2bn of net inflows from external clients, while Life grew 9%. Group net inflows from open business reached £2.4bn.
The Solvency II coverage ratio strengthened to 247%, from 242% at the year-end, and the group says it remains on track for its £2.7bn cumulative operating capital generation target to 2027.
But there were blemishes in recent results investors should be aware of. M&G reported an IFRS loss after tax of £165m, against a £248m profit a year earlier, driven by £551m of adverse short-term investment fluctuations, £325m of that tied to proposed ground rent legislation rather than anything operational. Operating capital generation also slipped to £372m from £408m. Neither impacts the dividend, but income buyers should consider the operating numbers rather than the headline IFRS figure.
Management guided to low double-digit full-year AOP growth, comfortably ahead of its “at least 5%” medium-term commitment, and reported a 73% cost-to-income ratio against a 70% target. Chief executive Andrea Rossi framed the half as proof of a more diversified, efficient and capital-light business.
FTSE 100 dividend play
Despite a material increase in M&G’s share price over the past year, the appeal for income seekers remains intact. M&G provides a high, progressive yield underpinned by a growing pool of fee-based earnings.
The yield has compressed from the double-digit levels on offer when sentiment was weaker last year, but M&G still earns its place in an income portfolio. Unfortunately, the bargain-basement entry point has gone.
The upcoming M&G dividend is payable on 16 October, with the stock going ex-dividend this week on 10 September.