Dividend play M&G suffers profit miss but inflows surprise

M&G Ordinary Shares (LSE:MNG)’s investment performance and its ability to attract new business are undoubted highlights, although a profit miss at these half-year results has been frowned upon by investors.

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Adjusted operating profit of £378 million for the six month to 30 June compared to £375 million in the corresponding period, but was notably shy of the £398 million which had been pencilled in by investors. A currency hit of £8 million in the Asset Management business contributed to the slightly disappointing result, although elsewhere there are many reasons for optimism.

Spun out of Prudential in 2019, there are unsurprising similarities between the two businesses to this day. Large addressable markets, changing savings trends as part of retirement planning and a strong balance sheet each provide firm springboards for prospects.

In addition, the highlight of the year was perhaps the announcement of a partnership with Dai-ichi Life of Japan, who intend to take a 15% stake in the M&G business. The tie-up will see M&G become Dai-ichi’s preferred asset management partner in Europe and is expected to generate at least $6 billion (£4.5 billion) of new business flows into M&G funds over the next five years, which should provide additional visibility to profits.

The subject of flows is one where the group has sailed past expectations in this period. Whereas it had been expected that net outflows from the business would continue to the tune of £3.1 billion, M&G has reported net inflows of £2.1 billion, representing an improvement of £3.2 billion from the previous year’s £1.1 billion deficit. The twin pillars of the Asset Management and Life businesses in combination was sufficient to reverse the group’s fortunes on this metric.

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The Asset Management business, quite apart from the Dai-ichi deal, saw net inflows of £2.6 billion, with a growing international presence whereby 58% of its Assets Under Management and Administration (AUMA) have an overseas leaning.

In addition, revenues grew by 3% to £514 million, while costs remained flat, naturally improving the contribution from this crucial unit. At the same time, its investment returns were strong despite the more recent market volatility, with 75% of the group’s mutual funds ranked in the upper two performance quartiles over three years.

Within the Life business, the group continues to focus on growing its Bulk Annuity Purchase presence in a particularly tough space, and will launch a new product next year which it believes will have something of a key competitive advantage. In the meantime, its flagship PruFund also enjoyed net inflows and contributed an adjusted operating profit of £112 million, up from £98 million the year previous.

The overall growth in AUMA to £354.6 billion from a previous £346.1 billion shows some hard-earned wins, while the group’s financial strength was further displayed with an increase in the Solvency II ratio, or capital cushion, to 230% from a previous 223% and against a 225% estimate. In turn, this enabled an increase to the dividend which has been a key attraction of the stock over recent times and where the projected yield currently stands at 7.9%, a compelling invitation to income-seekers in particular.

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There is of course a wider cloud which has hung over the group, relating to concerns at the retail level, with the possibility that stubbornly high interest rates could entice savers to switch back to bank deposits, while wider consumer spending pressure could see savings sacrificed temporarily as increasing energy and mortgage payments bite.

Despite these concerns, the share price has risen to record levels over recent times, and is up by 20% over the last year, as compared to a gain of 9.9% for the wider FTSE100. The appealing combination of an ongoing focus on costs, larger exposure to overseas markets via the Dai-ichi partnership and a generous dividend yield should be enough to maintain the market consensus of the shares as a buy.