I sold my shares in Lloyds (LSE: LLOY) recently and have invested some of the proceeds in M&G (LSE: MNG). This will increase my stake in the global investment manager, which I prefer over the bank for three key reasons.
Growth prospects
Lloyds’ 2023 results showed statutory profit after tax increased 41% — to £5.5bn from £3.9bn in 2022.
However, much of this jump in profitability came from a high net interest margin (NIM). This is the difference between the interest it receives on loans and the rate it pays for deposits.
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Market expectations are that UK interest rates will fall from here. This is a key risk for Lloyds, as it will cut its NIM dramatically over time, and its earnings with it.
Another major risk is possible legal action for mis-selling car loans through its Black Horse insurance operation.
Overall, consensus analysts’ forecasts are for Lloyds earnings to decline at 0.3% a year to the end of 2026.
Conversely, M&G is forecast to see its earnings increase by 20% a year over that period.
These figures look well-supported to me by its 2023 results. They showed a 28% rise in adjusted operating profit from 2022 — to £797m.
They also saw a 21% year-on-year rise in its operating capital generation last year – to £996m. It looks a solid basis to achieve its £2.5bn three-year operating capital generation target by the end of this year. This can be a major engine for growth.
There are risks for the investment firm as well, of course. One is a new global financial crisis. Another is its relatively high debt-to-equity ratio of around 1.9.
Nonetheless, a clear win in this category for M&G, in my view.
Share valuation
Lloyds’ price-to-book (P/B) ratio is 0.7, against its peer group average of 0.6. So, it looks slightly overvalued on this measurement.
M&G’s P/B is 1.2, against a peer group average of 3.1 Therefore, it looks very undervalued.
To work out how much, I used the discounted cash flow (DCF) model. This showed the stock to be around 49% undervalued at its present price of £2.01.
So, a fair value would be around £3.94, although this doesn’t guarantee it will ever reach that level.
Another big win for M&G in this category too.
Dividend yield
In 2023, Lloyds paid 2.76p per share in dividends. With the share price at 51p now, this gives a yield of 5.4%.
M&G paid a total dividend of 19.7p a share last year. This gives a yield on the current £2.00 share price of 9.8%.
This difference in yield on the passive income I could make over time is massive. It’s even more if I reinvested the dividends paid me – known as ‘dividend compounding’.
On this basis, if Lloyds yield averaged the same over 30 years, a £10,000 investment would grow into £50,348. This would pay me £2,641 a year, or £220 a month.
On the same provisos, £10,000 invested in M&G would increase to £186,913, paying £17,381 a year, or £1,448 a month!
So, a huge win for M&G here as well, making three convincing wins out of three in these categories.
Consequently, my decision to use some of the proceeds of my Lloyds sale to buy more M&G looks well-justified in my view.
