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M&G - shares jump on expectation-beating dividend

Nicholas Hyett, Equity Analyst | 9 March 2021 | A A A
M&G - shares jump on expectation-beating dividend

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M&G plc ORD GBP0.05

Sell: 194.40 | Buy: 194.55 | Change 2.35 (1.22%)
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M&G reported a full year underlying operating income of £1.9bn, down 3.9% on a year ago, with declines across both the Savings & Asset Management and Heritage life insurance businesses. Increased costs associated with becoming an independent business meant underlying operating profits before tax fell 31.4% to £788m.

The group paid a final dividend of 12.23p per share, up from 11.92p in 2019, taking the full year total to 18.23p.

The shares rose 5.7% in early trading.

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Our View

M&G is made up of two main business, M&G asset management and a closed book of UK annuities (meaning it's not selling any new annuities).

The group is hoping to sell its legacy annuities to Rothesay Life. If successful that would allow it to realise a good chunk of future profits associated with the business up front, and 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.

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

For an asset manager, it's the client taking the investment risk. The fund manager hasn't made any promises about the level of return on offer, and if the investments perform poorly it's the end client that ultimately takes the hit. As a result, regulatory rules are less stringent. That frees up cash, which can be returned to shareholders or invested to fund new growth.

That's important because future growth is going to be crucial to M&G's long-term success.

The rise of low-cost passive investing has made investors increasingly price sensitive, and active management fees are under pressure. That puts pressure on revenue. The obvious way to offset that headwind is by growing the group's assets under management or administration (AUMA), and that's why asset management is increasingly all about scale. The larger fund managers can afford to charge lower fees, helping them compete with passive alternatives, attracting new money and kick starting a virtuous circle.

With AUMA of £367.2bn, M&G is big, but not a giant in asset management terms. 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 AUMA 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 AUMA 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.

However, as we saw in 2020, that's by no means guaranteed. Retail investors withdrew assets in the face of the economic uncertainty caused by coronavirus. Management will hope better investment results in the second half of the year and a focus on sustainable investment going forwards turn that trend around - but outflows can drag on for years at a struggling asset manager.

Having said all that, conditions should stabilise in time. A large and mature asset book following the Rothesay annuity sale together with the capital the deal should mean the group's able to sustain its dividend going forwards (although of course nothing is ever guaranteed). Investors may well look at the yield approaching 9% and think the shares have been unfairly neglected in the short term. We have some sympathy with that view, even if we think the long-term outlook for growth is less rosy.

M&G key facts

  • Price/Earnings ratio: 9.1
  • Average Price/Earnings ratio since listing: 7.5
  • Prospective dividend yield (next 12 months): 8.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results

M&G's Savings & Asset Management business reported full year Assets under Management and Administration (AuMA) of £232.3bn, up 7.6% year-on-year. That growth was driven entirely by a market movements and the acquisition of Ascentric, with a £6.6bn outflow across the segment, driven by £12.1bn of outflows in Retail Asset Management. Outflows were driven by weak investment performance.

The division reported underlying operating income of £1.2bn, down 4.5% year-on-year, and together with a modest increase in operating expenses that meant operating profit fell 30% to £332m. Lower income reflects the decline in AUMA in Retail Asset Management, as well as ongoing fee pressure in the sector. The with-profits business (PruFund) also delivered lower profits as the business suffered from the market fall earlier in the year.

The Heritage business reported underlying operating income of £719m, down 3% year-on-year, as benefits from changes to longevity assumptions failed to offset lower investment returns. Underlying operating profit fell 7% to £699m, reflecting lower levels of insurance reserve releases during the year.

The group reported underlying capital generation during the year of $577m, down 26.3% on 2019. Management efforts to improve balance sheet efficiency meant non-underlying capital generation came in at £735m, for a total capital generation during the year of £995m, down 34.1% year-on-year.

As a result the group finished the year with a Solvency II ratio of 182% (2019: 176%) and a capital surplus of £4.8bn 2019: £4.5bn).

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.