The M&G (LSE: MNG) share price has gone sideways over the past 12 months. And it’s down 6% since the demerger from Prudential in October 2019. It was probably one of the worst-timed entries to the stock market ever, and the shares slumped when the pandemic arrived just a few months later.
But there are three main reasons I’m thinking of buying now.
The M&G business
Firstly, there’s the nature of the business. M&G is an investment manager. That means it makes money for its shareholders from other people’s money.
If the customers do well, the shareholders do well too. And if customers don’t do well, shareholders just do a little less well. M&G still levies its charges, but they’re just not as high if it doesn’t hit certain thresholds.
I don’t think the poor performance of the M&G share price reflects the resilience of that kind of business. What this means to me is that I would never hand over my cash for a manager to invest for me. But I would definitely buy shares in investment management companies.
M&G share price valuation
Next is the valuation. M&G recorded a big fall in earnings in 2021. But a closer look at the accounts shows that was down to negative short-term fluctuations in investment returns. The previous year saw a big positive fluctuation.
Adjusted operating profit looked fine, dropping 8.5%. Considering the difficult year it was, I’m happy enough with that.
With another tough year expected in 2022, analysts are estimating a P/E of around 10 on the current M&G share price. Forecasts have to be even less reliable than usual this year, due to severe economic uncertainties. But that looks attractive enough to me.
Passive dividend income
My final reason is the big one. It’s the prospects of fat dividends providing me with some nice passive income in the years, and decades, ahead.
M&G has been paying some cracking dividends, ever since its departure from Prudential. In 2021, the dividend yield came out at a very desirable 9.2%. On today’s M&G share price, the same cash would yield 8.5%. Even with no rise this year, that would still be one of the FTSE 100’s biggest yields.
Analysts currently expect M&G to deliver a 9% dividend this year. Even if that proves to be over-optimistic in the current economic climate, I still expect something close.
Risks vs rewards?
I reckon rising interest rates post a risk for M&G in the coming year. When interest rates are higher, other forms of investment look more attractive. And money typically flows from the stock market into bonds and similar.
Right now, government bond yields are rising. They are generally considered super-safe too, and that’s another attraction in times of economic upheaval. In today’s climate, I’d expect more investors to be thinking about wealth preservation than growth.
But on the upside, the investment management business has been a great cash generator for decades, and I’m convinced that will continue. The M&G share price makes it a buy for me.