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M&G - profit drops, cost saving on the agenda

M&G generated full-year underlying operating income of £1.9bn, up 2%.

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M&G generated full-year underlying operating income of £1.9bn, up 2%. Underlying operating profit fell 27% to £529m. That reflected declines in Asset Management and Retail & Savings, including non-cash charges of £172m.

Assets under management and administration (AUMA) decreased by £28bn to £342bn, driven mainly by adverse market movements. There were positive net flows into both Asset Management and Wealth for the second year in a row.

A free cash outflow of £1.1bn was driven by lower profits, compared to an inflow of £532m the prior year. The shareholder solvency II coverage ratio, a measure of balance sheet strength, fell from 218% to 199%.

By the end of 2025, there are plans to deliver £200m in cost savings and increase the proportion of underlying operating profit from Asset Management and Wealth to more than 50% of the group's total.

The board proposed a dividend of 13.4p, taking the full-year total to 19.6p, up 7%.

The shares rose 2.2% in early trading.

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Our view

2022 was a tricky time for asset managers, with tough market conditions and the uncertain global environment acting as tailwinds for both the value of assets and investor sentiment. Coming out with net client inflows was positive, and a focus on simplification and cost saving from the new man at the helm was well received.

M&G comprises two main business areas, M&G asset management, and a retail & savings arm that's essentially a closed book of UK annuities (meaning it's not selling any new annuities). The closed books are seeing net outflows, so the focus from here is on building out the asset management and wealth arms - hopefully taking them up to 50% of underlying operating profit by the end of 2025.

For an asset management company, the investment risk falls to the client. The fund manager hasn't made any promises about the return on offer, and if the investments perform poorly, the client ultimately takes the hit. As a result, regulatory rules aren't overly stringent. That helps free up cash that would otherwise be tied up to cover potential insurance claims, which can be returned to shareholders or invested to fund new growth.

That's important because future growth will 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 £342bn, 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 due to its complex structure.

Some hopes rest on the revamped 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. Progress is good and if it continues, PruFund solutions will be more accessible helping to flow growth for years to come.

The balance sheet is in a position of strength, which helps underpin the growing dividend. But investors should pay attention to free cash flow, which was negative in 2022. Existing capital can only sustain returns for so long, and the prospective 9.3% yield looks lofty to us. Nothing is guaranteed.

There's positive signs for the latest phase of M&G under new stewardship. But we'd like to see proof of more consistent flow growth, positive cash flow, and progress on cost cuts before getting too excited.

M&G key facts

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. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 9th March 2023