M&G back to positive flows and maintains dividend appeal

The performance from the Asset Management business in particular should cause some positive ripples, not only across the general view of M&G Ordinary Shares (LSE:MNG) but to the wider sector.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Net inflows of £7.8 billion to the business are perhaps the highlight, especially compared to outflows of £1.9 billion the previous year, with many expecting that decline to have continued. And higher fee-based earnings in Asset Management and a strong performance from the Life business more than offset lower investment income and performance fees. This led to adjusted operating profit of £838 million, which was largely unchanged from the corresponding period, but, importantly, was comfortably in excess of the £820 million which had been pencilled in by investors and was propelled in part by £250 million of cost savings across the board.

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. 

• Share Sleuth: the noise around AI is giving me brain fog
• L&G’s annual results trigger sell-off

In addition, the highlight of the year was perhaps the announcement of a partnership with Dai-ichi Life of Japan, who will 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 of new business flows into M&G funds over the next five years, which should provide additional visibility to profits. Indeed, £400 million towards this figure has already been chalked up in the first seven months.

The Asset Management business, quite apart from the Dai-ichi deal, saw net inflows of £300 million in the UK business, which compared to a previous £4.7 billion in outflows. In addition, a growing international presence whereby 58% of its Assets Under Management and Administration (AUMA) have an overseas leaning, saw an increase from £89 billion to £107 billion. This should be sufficient to offset any disappointment caused by a 3.1% dip in adjusted operating profit to £280 million and, 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 five years.

• Buying British: dividends, defence and diversification
• What would a longer war in the Middle East mean for investors?

Within the Life business, the group continues to focus on growing its Bulk Purchase Annuity (BPA) presence in a particularly tough space, and has launched a new UK With-Profits proposition which it believes will have something of a key competitive advantage. This is in addition to completing 11 BPA transactions during the year which added £1.5 billion of new business volumes. In the meantime, its flagship PruFund also enjoyed net inflows and contributed towards an adjusted operating profit of £764 million, a 2.4% increase. 

The circular relationship between Asset Management of a large part of the insurance business enables a certain visibility of earnings over the longer term. Indeed, the group’s store of future profit, including the CSM (Contractual Service Margin) is a measure of profit which will be released over time given the nature of investment and insurance products. In this period CSM rose by 10% to £6.6 billion.

The overall growth in AUMA to £375.9 billion from a previous £345.9 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 242% from a previous 223% and against a 233% 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 6.8%, a compelling invitation to income-seekers in particular.

• Want to pay less tax? Here are five allowances to use by 5 April
• Where investment professionals are investing their ISA

There is of course a wider cloud which has hung over the group, relating to concerns over the ferocity of competition 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 41% over the last year, as compared to a gain of 21% 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, albeit a cautious one.