When I was a lad in the 70s, one of the frequent visitors to our area was ‘the man from the Pru’. He was one of thousands of agents collecting small, weekly insurance premiums on behalf of FTSE 100 giant Prudential.
A new FTSE 100 member
The Pru has changed a lot over the decades, on its way to becoming a £31.7bn FTSE 100 heavyweight. Most recently, on 21 October last year, the Pru demerged investment manager M&G (LSE: MNG), which itself joined the FTSE 100 at the next reshuffle.
M&G on its own is a formidable business. The savings and investments firm has more than five million retail customers and 800 institutional clients in 28 markets. Its two main brands, Prudential and M&G Investments, are household names almost worldwide.
A small FTSE 100 firm takes a dive
As I write, M&G shares trade just below 170p, having risen 2% on Friday. This values the investment manager at £4.4bn, placing it among the 25 smallest members of the FTSE 100 by size. But they say that small is beautiful and, when it comes to M&G, I agree.
Since listing 10 months ago, M&G shares peaked at 245.9p on 19 February, before brutally plunging to just 84.1p on 18 March. Frankly, at below 85p, I think they were the bargain of the century, which is why they have doubled since those dark days.
M&G shares are cheap as chips
Even though M&G shares are up over 100% from their all-time low, I still see obvious value in this FTSE 100 stock. For example, they trade almost a third (30.9%) below their February high, so they’re far from their peak.
What’s more, when you crunch the numbers on M&G shares, they look insanely undervalued. Right now, they trade on a price-to-earnings ratio of 4.16, for an earnings yield of a whopping 24%. The dividend yield is a bumper 7%, covered 3.43 times by earnings.
In other words, this FTSE 100 share makes 24% a year, pays 7% of this in cash to shareholders and then reinvests the remaining 17% back into the business. With returns this dizzyingly high, I feel that M&G shares shouldn’t be 170p for much longer.
M&G has weaknesses – and strengths
Of course, if M&G’s future was blindingly bright, its shares wouldn’t be among the lowest-rated in the entire FTSE 100. In the investment business, fat margins are being eroded as investors switch from high-fee managed funds to low-cost trackers.
But M&G’s strength as a fixed-income asset manager is also supported by the extreme profitability of its run-off legacy insurance business. Also, M&G’s Solvency II ratio of 168% demonstrates its financial strength. Furthermore, as the FTSE 100 and other indices recover, the firm’s assets under management will grow.
While it’s hard to see bumper growth from M&G, it makes a strong case as a cash generator and dividend dynamo. Few investors could get excited about this FTSE 100 share, but that’s my point. It’s a boring business that will produce a torrent of cash over the coming decades. I’d happily buy and hold its shares today to grab a share of these future billions!