M&G shares yield a forward dividend of 8.5%

Much of the talk prior to these results was related to speculative bid rumours for hybrid money manager M&G (MNG) as talk swirled around the market that an imminent hostile bid was in the works. Indeed, the chief executive of Australian investment bank Macquarie, the object of suitor rumours, went on the record to dismiss the talk as “speculative”. While that seems to be the case, it underlines the sometimes, less than positive, impression that the direction and execution of M&G’s growth strategy has made since it was spun out from Prudential in 2019. Those doubts go some way to explaining why the company’s shares have been consistently some of the highest yielding on the market. The question that management may have to answer is this: could someone else do a better job?

In response, chief executive Andrea Rossi seemed to make an impassioned appeal in the results on behalf of the board. He spoke of how M&G has “…a clear strategy to build on the inherent strengths of our differentiated business model. We will maintain our financial strength, simplify our business and deliver profitable growth.”

There were also additional targets set for the end of 2025 designed to maintain shareholders’ collective interest, if not necessarily to set hearts beating faster: to grow the wealth management business to over 50 per cent of operating profit, to lower the group’s leverage ratio to below 30 per cent – which is the nominal value of its debt as a percentage of solvency II funds – something it last managed in 2021, while generating £200mn of cost savings over the same time span.

Operationally, the performance was M&G’s usual curate’s egg. Client flows at asset management were modestly lower at £154mn, while average fee margins were broadly stable at 32 basis points. Improving the performance of its asset management division is a priority, but progress on that isn't cheap – a combination of higher-than-expected costs and general inflation increased the expense ratio by 10 per cent to 77 per cent.

Making a clear judgement with M&G is not easy as the usual havoc in the reported numbers, caused by hedging M&G’s solvency II position, means investors are reliant on management-generated measures of performance. Even with bid rumours supporting the share price, the shares yield a forward dividend of 8.5 per cent, with a consensus price/earnings ratio for 2023 of 11. The reorganisation may still yield fractionally better returns. Buy.

Last IC View: Buy, 222p, 11 Aug 2022