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Is this FTSE 100 passive income superstar also its best bargain right now?

A pastel colored growing graph with rising rocket.
Image source: Getty Images

FTSE 100 investment firm M&G (LSE: MNG) remains one of the core shares in my high-yield portfolio. This is specifically designed to pay me high dividends each year.

From early on in my investment journey a (very) long time ago, two things occurred to me about dividend payments.

First, I liked having a regular return on my money. And second, I really liked having it when it involved me doing very little on a daily basis. I found out later that this is called ‘passive income’.

My subsequent career as an investment banker made me a lot of money but involved a lot of work – not ideal. My subsequent incarnation as a long-term private investor ticks both boxes.

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Approaching my quarterly review of my investments, I am looking to see if I should buy more high-yielding M&G shares.

Still undervalued?

To minimise the chance of my dividend income being nullified by sustained share price falls, I always buy undervalued stocks.

One key measurement to ascertain whether a share is undervalued is the price-to-book (P/B) ratio.  M&G is currently trading at a P/B of just 1.2. This compares to the average P/B of its peer group of 3.8, so it looks very cheap on this basis.

How cheap though? A discounted cash flow analysis shows M&G shares to be around 48% undervalued against its peers.

So, with the shares currently at £2.00, a fair value would be about £3.85.

This does not guarantee they will reach that price, of course. But it again underlines to me that they look one of the best bargains in the FTSE 100.

How strong does the business look?

Another key factor in my high-yield shares selection is whether the core business looks set for further expansion. This is because a company’s dividend and share price are powered by earnings and profit growth over time.

A risk in M&G shares is its relatively high debt-to-equity ratio of around 1.9. Another is a new global financial crisis.

However, 2023 saw a 28% rise in adjusted operating profit from 2022 — to £797m. Operating capital generation also increased sharply — by 21%, to £996m.

Consensus analysts’ forecasts are for M&G’s earnings to grow at 18.8% a year to the end of 2026. Earnings per share are expected to increase by 18.3% a year to that point.

How much passive income can be made?

M&G currently yields 9.9% — one of the highest in any FTSE index.

So, if I invested £10,000 now, I would make £990 in dividend payments this year. After 10 years on the same yield, I would have another £9,900 to add to my £10,000.

However, reinvesting the dividends paid me back into the stock (known as ‘dividend compounding’) would turbocharge my returns.

Specifically, doing this would give me an additional £15,703 after 10 years instead of £9,900!

After 30 years of doing this with an average 9.9% yield, I would have £169,797 in total. This would pay me £15,296 every year in dividends or £1,275 each month! I have to remember that dividend payouts can fall as well as rise, however.

Yet I still think M&G is one of the best bargains in the FTSE 100 – as well as paying one of its highest dividends – so I will be buying more soon.

The post Is this FTSE 100 passive income superstar also its best bargain right now? appeared first on The Motley Fool UK.

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Simon Watkins has positions in M&g Plc. 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