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M&G - still in limbo, but market conditions supportive

Nicholas Hyett, Equity Analyst | 10 August 2021 | A A A
M&G - still in limbo, but market conditions supportive

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M&G plc ORD GBP0.05

Sell: 189.25 | Buy: 189.35 | Change 2.40 (1.28%)
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M&G reported operating income of £917m in the first half, up 7.5% year-on-year. That reflects growth across the business, with fee-based, annuity and with profits revenues all growing.

Operating profits rose 5.8% to £327m.

The board announced an interim dividend of 6.1p per share, up 1.7% on last year.

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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 later this year. 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 £370.0bn, M&G is big, but not a giant in asset management terms. The PruFunds line of with-profits funds has been 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 the reason for the recently launched M&G Wealth platform. The idea is to offer advisers an all in one platform, funnelling assets from customers into M&G or PruFund products. If successful that could support revenue growth for years to come.

However, that's by no means guaranteed. In 2020 Retail investors withdrew assets in the face of the economic uncertainty caused by coronavirus. Management will hope improving investment results - with 92% of strategies ahead of their benchmark over 1 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.

Until the Rothsay deal completes M&G remains a bit in limbo. Once the annuity sale is complete though a large and mature asset book, together with surplus capital 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 8% and think the shares have been unfairly neglected. We have some sympathy with that view, even if long-term growth prospects are less rosy.

M&G key facts

  • Price/Earnings ratio: 10.3
  • Average Price/Earnings ratio since listing: 8.1
  • Prospective dividend yield (next 12 months): 7.9%

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.

Half Year Results

M&G reported fee income in the first half of £606m, up 4.5% year-on-year. That was driven by a strong result in Savings & Asset Management, where positive market movements more than offset £2.0bn of client withdrawals. As a result, overall Assets Under Management and Administration (AUMA) rose 2.5% to £238bn.

Within the division, Institutional Asset Management was the strongest performer, pulling inflows of £2.2bn, while the group's Retail Savings and Retail Asset Management business both saw outflows. Average asset management fee margins fell from 0.36 to 0.33 percentage points, as the group saw increased pricing pressure in its retail asset management business.

The Heritage business reported £157m of income from annuities, up 12.9%, with profits income broadly flat at £108m. The improvement in annuities reflects various releases related to the pending sales of the annuity book to Rothesay Life and release of provisions for possible miss-selling. There have been no changes to longevity assumptions based on COVID-19.

The group generated £869m of capital during the half, up from a £202m outflow a year ago. That reflects the benefit of market movements on the valuation of the group's investments. Operating capital generation came in at £309m, down from £539m.

Both operating and overall capital generation more than offset dividends paid in the half, resulting in the group's Solvency II ratio moving from 182% at the start of the year to 198%.

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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.