ii view: M&G pays big dividend even as profits slump

2020 was a tough start for this former Pru business. We assess prospects for 2021. 

Full-year results to 31 December 2020

Chief executive John Foley said:

"In our first year as an independent company, we have delivered a strong and resilient performance in one of the most challenging operating environments ever.

"This demonstrates the value of our diversified and integrated business model, both to customers and clients, and to shareholders.

"We laid the foundations for M&G's return to growth, including actions to fix Retail Asset Management and the creation of M&G Wealth following the acquisition of Ascentric.

"I want to thank all my colleagues for their resolve and commitment in the face of the pandemic, as they continue to serve our customers and clients from the safety of their homes."

ii round-up:

Fund manager M&G (LSE:MNG) today reported a near one-third drop in profit as a combination of retail fund withdrawals, the pandemic and standalone costs following its separation from the Prudential (LSE:PRU) all weighed. 

Adjusted operating profit fell by 31% to £788 million, but that still exceeded City forecasts of closer to £720 million. M&G shares rose by more than 7% in UK trading, leaving them up by close to a quarter over the last year. Shares for rival Schroders (LSE:SDR) are up by more than 40% over the same time. 

Employing approximately 6,000 staff, M&G has around 5.3 million retail customers and more than 800 institutional clients. 

Assets under management rose by 4% to £367 million, largely due to its purchase of Royal London’s IFA platform business Ascentric during the year. Ascentric now forms the foundation of its new advisor platform for its M&G Wealth division. 

But despite an increase in funds to manage from institutional clients, M&G suffered a net fund outflow of £6.6 billion over the year, given an early year investment underperformance for its retail funds. 

The group’s core profit smoothing or with-profits PruFund also suffered as face-to-face restrictions under the pandemic hindered advice and sales. 

However, management action had seen a second-half weighted performance improvement for its retail funds. Two-thirds of funds, weighted by size, performed above the median on a six-month basis.

A broad push towards sustainable or environmentally friendly investing, including a new green PruFund, is also expected to aid sales going forward. 

Management reiterated a three-year £2.2 billion target for capital generation as it remains on track to achieve annual cost savings of £145 million through business transformation and modernisation by 2022. 

A final dividend of 12.23p per share was declared, adding to a 6p per share interim dividend paid back in late September. 

ii view:

M&G is a savings and investment business. Managing money for both individual or retail savers and institutional investors, it operates across more than 25 markets. Following its demerger from Prudential, M&G shares began trading in London in late October 2019. 

M&G now operates the under the two brands of Prudential for savings and insurance customers in the UK and Europe and for asset management in South Africa and M&G Investments for asset management clients globally.

An ageing population and moves by government to place a greater emphasis on individuals to save for their own retirements provide for a favourable backdrop, but competition in the asset management arena remains intense. The growing popularity of low-cost index tracking products has put more traditional managers under pressure to compete and reduce fees.

For investors, poor investment performance for its retail funds has caused an overall loss of monies managed during this first year of independence. Low-cost managers such as Vanguard continue to compete hard, and a loss of overlaps with its former parent has also raised costs, but action to address challenges is evident. A push towards green friendly investments also looks highly sensible. M&G’s size offers potential for acquisitions and a dividend yield over 8% is significant in this current low-rate era. In all, while some investors may wish to wait for more evidence of recovery, the maintenance of a generous dividend and likelihood of a return to growth his year may draw attention to M&G.

Positives: 

• Taking action to improve retail investment performance
• Attractive dividend payment (not guaranteed) 

Negatives:

• Heavy competition
• Adjusted operating profit fell

The average rating of stock market analysts:

Strong hold