M&G reported full year underlying operating income of £1.9bn, up 0.6%, with declines in Asset Management offset by Retail and Savings, which includes the Wealth and Heritage life insurance businesses. Underlying operating profits before tax were £721m, down on last year's £788m, but better than analyst expectations. The reduction partly reflects reduced benefits from changes in expected death rates.
The group said: "This strong performance has resulted in the achievement of our total capital generation target of £2.2 billion by the end of 2022, a year earlier than planned".
A second interim dividend of 12.2p and a £500m share buyback programme were announced.
The shares rose 11.9% in early trading.
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 transfer of legacy annuities to Rothesay Life is a big milestone. Such a move allows 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 helps free 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.
That adds weight to the launch of the 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. Impressive results and a focus on offering sustainable funds has seen that trend reverse, with a small net inflow recorded for the year. That is undoubtedly a step in the right direction, but we would like to see the trend continue - and with current market uncertainty at fever pitch, this may be difficult.
The group's surplus capital should mean it's hopefully able to sustain the dividend, although of course nothing is ever guaranteed. Investors may well look at the prospective yield which is currently double digits and think the shares have been unfairly neglected. We have some sympathy with that view, even if long-term growth prospects are less rosy.
Full Year Results
M&G Asset Management business reported full year Assets under Management and Administration (AuMA) of £156.7bn, up from £144.4bn. There was a net client inflow of £2.0m compared to net client outflows of £6.8bn in 2020. Inflows were "supported by positive flows into the impact and sustainability focused fund ranges", and there was also positive investment performance.
The division reported underlying operating income of £976m, down 1.3%, while underlying operating profit before tax was down 5% to £315m.
The Retail & Savings business reported underlying operating income of £915m up from £890m, including growth across fee-based revenue, helped by the Ascentric acquisition. However, reduced annuity margins because of lower benefits from changes in longevity assumptions, meant underlying operating profit before tax fell 5.8% to £660m.
Improved equity market conditions and increased yields helped total capital generation reach £1.8bn, up 83% on 2020.
The group finished the year with a Shareholder Solvency II ratio of 218% and a capital surplus of £6.2bn.
M&G is now targeting capital generation of £2.5bn over the next three years to the end of 2024.
M&G key facts
- Price/Earnings ratio: 8.5
- Average Price/Earnings ratio since listing: 8.3
- Prospective dividend yield (next 12 months): 10.5%
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.
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.
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