Shares in FTSE100 Investment Manager M&G (LSE: MNG) have fallen around 14% from their trading high of £2.41 on March 21.
In my opinion, there are two main reasons for this.
First, the UK financial sector continues to suffer from the crisis following the Brexit vote in 2016. It was argued that this would cause the country to lose its position as Europe’s most important financial centre. However, this has not happened.
Second, investors don’t like uncertainty, and that’s exactly what they saw ahead of the 2024 general election. The new government has a clear majority, which should remove much of that nervousness.
Are the shares currently cheap?
To determine whether a stock is undervalued, I use, among other things, the price-to-book ratio (P/B).
M&G is currently trading at a P/B ratio of just 1.2. The average P/B ratio of the peer group is 3.9, so on this basis the company appears very cheap.
But how cheap is that? A discounted cash flow analysis shows that the shares are undervalued by around 47% compared to the competition.
Therefore, at a current price of £2.08, the fair value of the shares would be approximately £3.92.
They could go higher or lower, but this gives me a good idea of how undervalued they appear.
What are the growth prospects?
The price and dividend of a share depend on sustainable profit growth. In the case of M&G, these appear to me to be very good.
In 2023, adjusted operating profit increased 28% to £797 million compared to 2022.
Working capital rose 21% to £996 million. Combined with the amount for 2022, this has brought the company’s funds to £1.8 billion. It now appears very well placed to reach its target of £2.5 billion by the end of this year.
This huge war chest can be used to finance further growth and support the dividend increase.
One risk with the stock is a relatively high debt-to-equity ratio of around 1.9. This contrasts with the upper end of the range of 1.5, which is considered good for many companies, depending on the industry. Although several investment firms use debt to fund growth, I would like to see this number come down.
However, analysts expect M&G’s earnings to grow by 18.6% annually until the end of 2026. Earnings per share are expected to grow by 18.2% annually by then.
Huge dividend payer
M&G shares pay one of the highest dividends of any FTSE indices – currently 9.5%.
If I invest £10,000 in it now – and reinvest the dividends back into the stock (“dividend compounding”), I would have a total of £25,761 after 10 years. That would give me £204 in dividends per month.
After 30 years at the same average return, my M&G investment would be worth £170,949. That would give me an income of £16,240 per year, or £1,353 per month!
The stock’s huge dividend potential, extreme undervaluation and underlying growth prospects are too good to pass up, so I’ll be buying more of it very soon.
The post “9.5% yield but 14% down! Is it time for me to buy more of this shiny FTSE 100 gem?” appeared first on The Motley Fool UK.
Further reading
Simon Watkins holds positions in M&G Plc. The Motley Fool UK has recommended M&G Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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 broad range of insights makes us better investors.
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