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9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain?

Happy couple showing relief at news
Image source: Getty Images

The UK’s flagship index is home to a wide range of dividend-paying enterprises offering impressive yields. While the index, overall, currently has an average payout of 3.6%, 35 companies are actually paying more than this. And among the most generous stands M&G (LSE:MNG), with a chunky 9.9% yield.

Seeing such a high payout can be a red flag. After all, these are usually created by a sudden drop in share price following some disappointing results. Yet, this doesn’t seem to be the case with M&G. Over the last 12 months, the stock’s basically flat, meanwhile, management continues to hike dividends. So is this a terrific bargain for income-seeking investors?

Getting things back on track

As a life insurance and asset management enterprise, M&G has been on a bit of a roller coaster ride throughout the shifting economic landscape. Management has been busy optimising the firm and pursuing opportunities to improve efficiency and margins. And the strategy appears to be working since the group is on track to deliver £200m of annualised savings by 2025.

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Higher rates from the Bank of England have sparked renewed interest in the firm’s annuity products. And with the stock market starting to recover from the 2022 correction, the firm enjoyed a steady influx of fresh capital from customers. As such, the total assets under administration at the end of 2023 increased to £343.5bn versus £342bn in 2022.

What’s more, this figure could be set to rise even higher this year, M&G has re-entered the bulk purchase annuity market for the first time since 2016. And this move is expected to deliver an extra £1bn to £1.5bn in annual sales moving forward.

Overall, management appears confident in hitting its £2.5bn operating capital generation target by the end of this year. And with seemingly no immediate plans to cut back on dividends, the business certainly looks attractive as an income opportunity.

What to watch

The mini-budget in September 2022 continues to create headwinds for institutional M&G customers. In fact, management reported that another £0.7bn of capital outflows occurred throughout 2023 as a consequence of this ill-conceived policy.

Another point of contention is the company’s Solvency II leverage ratio. In oversimplified terms, Solvency II assets are kept on the balance sheet for the specific purpose of absorbing losses. Some examples include retained earnings, paid-in capital, and long-term debt. The leverage ratio compares these liquid assets to the value of the firm’s subordinated debt. In short, the lower, the better.

Management’s targeting to get this metric below 30% by 2025, improving the group’s financial health. For reference, it’s currently sitting near 35%. To hit this target, the group’s outlined a £450m deleveraging plan, which involves redeeming some of its outstanding loans early along with some tender offers.

However, by executing this strategy, M&G is putting temporary pressure on its coverage ratios. At the end of March, coverage stood at 203%. But following this deleveraging plan, it could fall to as low as 160% by management’s own estimates. That’s certainly not terrible. But it increases short-term risk if economic conditions take another turn for the worse.

All things considered, I think there are other high-yield opportunities available today that come with lower-risk exposure. Therefore, despite the generous payout, I’m keeping M&G on my watchlist for now.

The post 9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024