Imagine aiming for an impressive annual retirement income of £12,959 from a mere £20,000 investment in one of the highest-yielding shares on the FTSE 100. Sounds intriguing, right? Let me share my strategy involving M&G (LSE: MNG), which I believe is one of the most attractive income stocks in the index today. With a dividend yield that ranks among the highest and a current price that seems significantly undervalued, M&G presents a compelling opportunity. What’s more, projections for robust earnings growth suggest that this situation could improve even further.
This unique combination of immediate income alongside potential capital appreciation positions M&G as a rare dual-benefit investment. So, just how much of this promising opportunity is still being overlooked by the market?
One of the primary drivers behind any company's stock price and dividends is its earnings growth. However, there is an inherent risk for investment firms like M&G; a prolonged downturn in equity or bond markets could lead to a decrease in assets under management, impacting their fee income and ultimately their earnings.
Despite this risk, analysts are optimistic, with consensus forecasts indicating that M&G’s earnings are expected to grow at an impressive rate of 34% annually through the end of 2027. This optimism is backed by recent performance results that showcase solid momentum in both revenues and profits.
For instance, during the first half of the year, released on September 3, M&G reported an adjusted operating profit before tax of £378 million. In a remarkable turnaround, net flows surged to £2.1 billion, reversing a £1.1 billion outflow recorded in the same period last year. Additionally, their assets under management increased to £354.6 billion, up from £346.1 billion. Not only did M&G's Asset Management division expand, but they also improved their cost-to-income ratio, reducing it from 77% to 75%.
These positive trends continued into M&G’s 2024 results, published on March 19, where adjusted operating profit before tax climbed 5% year-over-year to £837 million, largely driven by a 19% growth in their Asset Management sector.
M&G has also adopted a progressive dividend strategy, which means that future payouts are expected to rise at least in line with earnings per share. Importantly, if earnings decline, the dividend will remain intact rather than be slashed.
It’s essential to recognize that a stock’s price does not always accurately represent its true value—often, it can be quite distant from it. The market price is determined by what buyers are willing to pay, while the value is rooted in the fundamentals of the underlying business.
This discrepancy between price and value is often where savvy investors can uncover significant long-term gains. Over time, asset prices generally adjust toward their fair value.
Utilizing the discounted cash flow model—a method that estimates the right price for a stock based on the expected cash flows from the business, including earnings growth—M&G’s current shares, priced at £2.77, appear to be undervalued by 56%. The model suggests that their true fair value should be around £6.30.
Now, let’s talk about potential income generation. M&G declared a dividend of 20.1p for 2024, translating to a current yield of 7.3%, which is more than double the average yield of 3.1% found in the FTSE 100. Analysts anticipate that this yield will increase, with predictions of 7.8% next year and 8.1% by 2027.
While it's true that dividend yields can fluctuate over time due to share price movements and changes in dividend payments, if we only consider the current yield of 7.3%, my initial £20,000 investment in M&G could yield £21,410 in dividends after ten years, assuming I reinvest those dividends to take advantage of compounding.
Looking further ahead, after 30 years, my investment could grow to generate £157,523 in total value, providing an annual dividend income of £12,959.
Given all these factors—its undervalued share price and strong prospects for earnings growth—I’m eager to increase my stake in M&G very soon. But what about you? Do you think M&G is a wise investment choice, or do you have reservations? I’d love to hear your thoughts in the comments!
