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M&G - dividend intact

Nicholas Hyett, Equity Analyst | 27 May 2020 | A A A
M&G - dividend intact

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M&G plc ORD GBP0.05

Sell: 199.10 | Buy: 199.25 | Change 5.10 (2.64%)
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M&G reported underlying operating profits in the first quarter of £134m, with good operating performances offset by negative market movements.

The group will pay its 11.92p per share ordinary dividend and 3.85p special dividend as previously announced.

The shares rose 8.9% in following the announcement.

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Our view

Following the demerger from Prudential, M&G is made up primarily of M&G asset management and Prudential's UK life insurance business.

However, the group is hoping to pass on a lot of its legacy UK life liabilities to Rothesay Life. If successful that would leave it managing the assets without taking on the risks inherent in life insurance. That's a potentially attractive place to be, because compared to life insurance, asset management is a capital light business.

Life insurers have obligations to their customers and meet those by investing the premiums they receive. But as there's always the risk the investment doesn't generate the level of return expected, regulators insist life insurers hold a certain amount of capital to meet obligations. Shareholder money is essentially tied up doing not a great deal.

For an asset manager, it's the client taking the investment risk, so regulatory rules are less stringent. That frees up cash, which can be returned to shareholders or invested to fund new growth.

Combining conventional fund management with legacy life insurance and a growing 'with-profits' funds business has given the group scale with £323bn of assets under management and administration (AUMA). And in fund management scale is key. Once the costs of running a fund are covered all the extra management fees are profit.

It's not all plain sailing though. The rise of low cost passive investing has made investors increasingly price sensitive, and active management fees are under pressure as a result. The PruFunds line of with-profits funds is selling well, but the product gets treated with suspicion by many UK investors and the UK is a relatively mature market in any case. Growth in AUM could be hard to come by, and revenue growth even more so.

We suspect that's one of the reasons M&G has gone shopping. The purchase of Royal London's platform business adds a relatively small sum to AUM today, but it also provides access to 1,500 advisory firms and over 90,000 retail customers. If it can funnel assets from these customers into M&G or PruFund products that could support revenue growth for years to come, but that's by no means guaranteed.

However, the wider uncertainty in global markets caused by the coronavirus outbreak is an extra headwind, with the group's Solvency II Ratio (a key measure of its capitalisation), dropping as a result. The indicators are far from flashing red, but it's one to watch.

All-in-all the short-term looks challenging. While conditions should stabilise in time we still struggle to see how growth can really accelerate from here. The shares currently offer a 13.6% prospective yield, which suggests we aren't alone in thinking growth, or even just maintaining the status quo, could be a struggle.

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First Quarter Trading Update

Total Assets Under Management and Administration (AUMA) fell 8% to £323bn during the quarter - with market movements accounts for 7% and 1% from client outflows.

Institutional Asset Management saw inflows of £2.1bn during the quarter, with £0.7bn of inflows in Retail Savings. However, this was more than offset by £5.6bn of outflows in Retail Asset Management, mainly in March and moderating in more recent periods.

Savings & Asset Management operating profits came in at £74m, with £166m from the Heritage back-book business. The Corporate Centre reported a £106m loss in the quarter, largely as a result of costs associated with debts taken on from Prudential following the demerger and establishing a new head office.

M&G generated £467m of operating capital during the quarter, offset by £700m of market movements and non-operating items. As a result total capital fell by £311m, with a further £410m deduction for the planned dividend. As a result the group's Solvency II ratio fell from 176% at the start of the year to 168%.

As at 31 March just 2% of the credit portfolio had experienced downgrades in credit rating.

Alongside results M&G announced plans to acquire Royal London's adviser and wrap platform Ascentric.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.