A 9.6% yield but down 11%! This FTSE 100 stock looks cheap to me

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FTSE 100 global investment manager M&G (LSE: MNG) has lost 11% of its value from 2 March this year.

Like many UK financial companies back then, this was largely due to fears of another financial crisis, in my view. These were sparked by the failures of Silicon Valley Bank and Credit Suisse.

Ultimately, no crisis emerged, but M&G’s shares are still marked down, providing what I think is a major buying opportunity.

The advent of a genuine new crisis is always a risk for the shares, of course. Another is that inflation and interest rates might stay high, acting as a deterrent to new client business.

Strong core business

Yet there are plenty of plus points. M&G’s Shareholder Solvency II coverage ratio is very strong, at 199%. A ratio of 100% is the regulatory minimum for the industry.

The company highlighted in its H1 results that it is on track to achieve operating capital generation of £2.5bn by end-2024. This on its own can provide a powerful engine for further growth.

Analysts’ expectations are now for respective increases in earnings and revenue of 48.6% and 109.7% in 2024.

Undervalued to its peer group

The fact that the shares have dropped 11% does not necessarily make them undervalued, of course. The company could just be worth less now than it was before.

To find out which is the case, I compared its price-to-book (P/B) ratio with those of its peers. M&G’s P/B is 1.2, while RIT Capital Partners’ is 0.7, Burford Capital’s is 1.4, St. James’s Place’s is 2.9, and Wise’s is 10.6.

On this measurement, M&G looks undervalued.

To ascertain what a fair value might be, I applied the discounted cash flow (DCF) model. Given the assumptions involved in this, I used several analysts’ valuations as well as my own.

The core assessments for the company are between 44% and 54% undervalued. The lowest of these would give a fair value per share of £3.64.

This does not mean that the shares will reach that point. But it does underline to me that they offer very good value.

Star passive income generator

M&G is one of just a few companies in the FTSE 100 that yield over 9% a year.

In 2022, it paid 19.6p per share total dividend – a 9.6% return, based on the current share price of £2.04.

There is every chance in my view that this may increase this year. Its interim dividend was 6.5p, compared to last year’s 6.2p.

If this increase was applied to the total dividend then this year’s payment would be 20.54p. At the current share price, this would give a yield of 10.1%.

Even if the payout stays the same, a £10,000 investment would make £960 in passive income this year.

Over 10 years, if the yield and share price stayed the same, £9,600 would be added to the initial investment. There would be tax implications for such gains, of course, depending on individual circumstances.

I bought the shares recently (despite already having other holdings in the sector) for three key reasons.

First, the business looks primed for strong growth. Second, I think its share price will gradually converge towards its fair value, although precisely when is impossible to predict. And third, the passive income generated by the shares is too good for me to ignore.

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Simon Watkins has positions in M&g Plc. The Motley Fool UK has recommended Burford Capital, M&g Plc, and Wise 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.