Baptism of fire for high-yielder M&G

After a good start to life after the Pru, major events have made life tough, writes interactive investor's head of markets.

It is far from an ideal time to be announcing its maiden results, but M&G (LSE:MNG) is nonetheless showing early vindication of the logic for the demerger from Prudential (LSE:PRU).

Unfortunately, it has been something of a baptism of fire for the shares, which have dropped 22% since going it alone in October. In its short life independent of the Prudential, it has already had to navigate Brexit uncertainty leading up to December’s general election, and the temporary suspension of its Property Portfolio Fund following a number of sustained redemptions. Now, the market plunge has caught M&G in the crosshairs of generally souring market sentiment.

Source: TradingView Past performance is not a guide to future performance

The asset management contribution was shy of expectations, as was the combined dividend payment and, although the adjusted operating profit was in line with expectations, it represented a 29% fall on the comparable previous year figure. 

Meanwhile, competition in its markets continues to grow apace, while the generally brittle market backdrop at the moment provides additional headwinds, as evidenced by the updated solvency ratio (used to measure the ability of a company to meet its long term debts). Although the full-year results report an improvement to 176%, an updated version on 6 March has shown that this figure now stands at 166%, with volatility since likely to result in additional pressure on the ratio.

Even so, there is little question that the balance sheet is strong, while the demerger seems to have gone without incident from an operational perspective. Assets under management grew to £352 billion, beating a consensus figure of £342 billion which itself represented a rise of nearly 7%. The profit after tax also showed a considerable improvement against available comparatives and the net client outflows were rather less than had been feared. 

Perhaps most importantly from a strategic perspective, the long-term savings requirement for individuals will, without question, continue its strong growth for the foreseeable future, and the likes of M&G should be well-positioned to benefit from the opportunities that will be presented. 

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From an investment perspective, and excluding the special demerger dividend, the implied yield on the ordinary dividend is almost 7%, which is an early signal of management confidence in prospects and a clear invitation to income-seeking investors, especially given that the current market turmoil may yet result in further downward pressure on interest rates which are already at historic lows.

The initial reaction to the numbers has focussed on the areas where M&G has missed expectations, alongside the rising competition in areas which threaten some of its traditional strength, such as the rise of popularity of passive rather than active funds. Even so, based on a limited consensus, the market view of the shares recognises the longer-term prospects and currently shows as a “buy”.