M&G, one of the oldest names in fund management, has had a miserable time since its erstwhile parent, Prudential, floated it on the stock market three years ago, just before the pandemic struck. The shares began at 197p but sank below 100p in March 2020. After a fitful recovery they have fallen from 219p to 160p since interim results in August. This weekend one of the last links with the troubled past, the chief executive John Foley, is to step down in favour of Andrea Rossi, who comes from 22 years with the French insurer Axa.
Rossi calls this an “inflection point” for M&G, the moment in geometry where a graph function changes from concave to convex. Or vice versa. Either way, he has a lengthy to-do list, not the least of which is coming up with a strategy.
He does not deny reports of animosity between the group’s fund managers and the mainly ex-Pru management but he admits that he needs to improve the atmosphere at the Fenchurch Avenue head office. Now children, play nicely.
M&G consists of fund management, wealth management, savings and life assurance. Rossi says he will simplify the complicated organisation chart, while ruling out splitting the group into two or more.
In the six months to June 30 there were net outflows of £1.9 billion, mainly from the mature Prudential with-profits fund, which M&G manages, and pensioners drawing savings. Falling bond and equity markets took assets under management down 6 per cent to £349 billion and adjusted operating profits fell 44 per cent to £182 million. Clients, individual and institutional, lost £23 billion in the period and the group registered a £1.05 billion accounting loss after the lower asset values hit the balance sheet.
On the other hand, more retail investors bought into funds than redeemed them, producing net inflows of £800 million, compared with a £3.4 billion net outflow in the first half of 2021. The Shareholder Solvency II coverage ratio was a healthy 214 per cent.
The internal squabbling may have depressed the share price, and put off potential takeover bidders, but it could be that nearly all the bad news is in the share price. M&G has a long-established name and a sound underlying business. Rossi sees it as his task, at least early on, to get it working smoothly again.
He could have been forgiven for an attack of last-minute cold feet last week as roughly two thirds of M&G’s capital comes from the Heritage bond portfolios that were in the front line of the gilt market turmoil. The question is, where does he take the business? As Foley recognised, M&G’s UK profile is a fraction of its former self and it has not taken advantage of the freedom to go international that became available when it left the Pru. The IFA/wealth manager route is another possibility, although expensive to implement.
The 11.05 per cent dividend yield is usually a sign that a company is in trouble. A half-year attributable loss of £1.05 billion cannot have helped. Shareholders anyway collected a 6.2p interim dividend, in line with a policy of paying a third of the previous year’s total. Kathryn McLeland, finance director, said in August: “When we talk about an intention for the full year to be broadly in line, we feel really confident around that, given what we’ve delivered in the first half.” That suggests that 18.6p is pencilled in for 2022.
Last Friday the company spent £6.6 million buying its own shares, part of a buyback programme that reached £150 million in the first half, so it is not afraid to splash the cash in shareholders’ pockets.
If the stock market becomes convinced that the dividend is safe then the shares are surely due for a significant re-rating. Even if it were halved, that would still leave a 5.5 per cent yield. But much hangs on where Rossi takes M&G.
ADVICE Buy
WHY Most of the problems are out there, and Rossi has plenty of incentive to take the group forward
Dignity
Shares in the funeral provider Dignity should perform much like a bond but instead their six-year decline has been, well, undignified.
The incidence of UK deaths is usually consistent and costs and prices rise broadly in line with inflation. The pandemic gave a brief fillip but the company has since been coping with the inevitable hangover as funeral numbers returned to normal, complicated by a new strategy of more branch autonomy and lower prices.
For the half-year to July 1 the UK had 319,000 deaths, 21,000 fewer than in the same period last year. On underlying revenue down from £169.4 million to £141.2 million,
pre-tax profit collapsed from £23.2 million to £600,000 and earnings per share (EPS) turned from 36.2p to a loss of 1.2p.
As this was well signalled, it is revealing that the shares have fallen from 395p to 340p since Friday’s announcement. In January they were 756p and in 2016 they reached £26. The full 2022 outcome will be bloody, so expect hopeful noises in next year’s annual report. Investec analysts see a gentle upward trend in normalised EPS from 27.3p for this year, to 28.8p next and 30.3p in 2024.
The latest share falls may have been prompted by a note in Friday’s statement that average revenue shrank from £2,478 in first-half 2021 to £2,115, partly owing to “lower-cost funeral options”. The singer David Bowie, who died in 2016, started a trend by arranging for a “direct” cremation, without family or friends, but with separate celebrations. This changing fashion may present Dignity with opportunities to organise what would in effect be themed parties. And, with appropriate branding, why stop at funerals?
In July the company received Financial Conduct Authority authorisation for its funeral plans. That extra credibility should produce useful income.
Nevertheless, with dividends off the table for the foreseeable future and an unproven new strategy, it is not yet time to invest.
ADVICE Hold
WHY Too soon to buy, but worth putting on a watch list
