Shares in UK-headquartered savings and investment dividend stock M&G (LSE: MNG) have dropped over 15% from their March high. This seems extraordinary to me right now as never in my lifetime has the appeal of dividend stocks been greater.
The reason is because over the past five years, the FTSE 100 itself has not advanced even a single penny. And this has brought into question the longstanding core notion of investing in benchmark indices.
This notion, simply, is that investor can expect to double their money every 10 years. It is possible to do this through dividends alone. If an investor receives a 10% return on their stock holdings every year, then in 10 years their capital has doubled.
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But it helps — when the average dividend is less – that any shortfall is filled by underlying growth in stock prices. Add reinvested dividends and compound interest into this mix and this idea has worked for decades.
If the index makes nothing, then the onus falls more on picking the right dividend stocks.
Negative factors no longer in play
To me, M&G is one such stock. Better still, it is at a knockdown price, which means a likely capital gain in addition to high dividend payouts.
It is at this price for two main reasons, neither of which are relevant to it today, in my view.
The first is that it struggled for a while to find investment consistency after it split from Prudential in 2019. The second is that it was hit by fallout from the failures of Silicon Valley Bank and Credit Suisse.
Core business is solid
Even at the time of the ‘mini-banking crisis’ in March, M&G’s finances were very strong.
Its 2022 results showed operating capital of £821m, with improved underlying capital generation of £628m. This is one element of the resilience in its business model.
Another is that it maintained a Shareholder Solvency II coverage ratio of 199%. This ratio measures how well shareholders are protected against a company becoming insolvent. Coverage of 199% for an investment company is regarded as strong.
According to a company update on 8 June, its Solvency II coverage ratio was up to 200%.
Additionally positive in the update was £1bn of net inflows to its wholesale asset management business in Q1. This was up £0.3bn from Q1 2022.
M&G added that it intends to lower its overall leverage ratio to below 30% and generate £200m of cost savings.
Excellent shareholder rewards
In the 2022 results, it also declared a second interim dividend of 13.4p per share. Its total payout for 2022 was 7.1% higher, at 19.6p from 18.3p.
This meant a dividend yield for the year of 10.4%. In both 2021 and 2020, it was 9.2% — among the highest of any FTSE 100 firm.
There are risks in the share price, of course. One is a major correction in the global investment environment again. Another is that M&G fails to deliver on its investment strategies.
However, if I did not already have holdings in the sector then I would buy M&G now. For the yield alone I think it is worth it. But I also think that the shares will recoup all this year’s losses within the next 12 months at worst.
