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Are M&G shares a good investment?

by | Last updated 26 Nov, 2022 | Financials

M&G Plc (LSE:MNG) shares have had a few rough weeks lately. Despite remaining relatively flat throughout most of 2022, the share price has since adopted a downward trajectory pushing the 12-month return to a disappointing -17%.

The group first went public in the United Kingdom on the London Stock Exchange back in October 2019. Since then, shares haven’t exactly performed well, falling by nearly 25%, significantly behind the FTSE 100 index. To be fair, the stock market hasn’t exactly been a hospitable place with the Covid-Crash in 2020 and the ongoing stock market correction in 2022.

But has this actually created a buying opportunity for my portfolio? And if so, are M&G shares a good investment?

What does M&G do?

M&G is a global investment management company based in London. It was formed as a demerger from Prudential Plc as the latter refocused its target market to Asia and the United States.

The company invests in and manages a wide range of financial assets and investment vehicles, including:

What’s more, management also delves into the realm of the private finance sector through various instruments, including:

  • Structured Products
  • Leveraged Finance
  • Projects
  • Infrastructure Finance

M&G has two primary operating divisions: Asset Management and Retail & Savings. These, in turn, operate under numerous brands, including:

  • PruFund
  • M&G Wealth
  • M&G Investments
  • M&G Real Estate
  • InfraCapital

In total, this enterprise is present in 28 markets across five different continents, with over 5,590 employees worldwide. But how do the fundamentals of M&G shares look today?

Financial performance of M&G shares

After splitting from Prudential, the management team set itself an ambitious target of reaching £2.2bn in capital generation within three years.

During 2020 and 2021 combined, the group hit £2.8bn in total generated capital placing well on its way to hitting this goal. And despite what the recent trajectory of M&G shares would suggest, this strong performance seems to have continued into 2022. So much so that management just raised its 2024 capital generation target to £2.5bn.

Another goal laid out in the early days was consecutive year-on-year dividend growth. And even with the disruptions of the pandemic, this is exactly what the company has delivered so far. In fact, since its initial listing, the group has returned £2bn to investors through both dividend payments and share buybacks.

Looking at its latest interim results, M&G reported strong performance across its institutional, wholesale, and PruFund business segments. Consequently, its Wholesale Asset Management department returned to positive growth, while the group’s overall solvency ratio hit 214% amidst a challenging market environment.

In other words, the company has more than enough cash flow to cover its long-term financial obligations, significantly reducing the risk of a stock bankruptcy.

The business reported a net client inflow of £1.2bn, with adjusted operating profits landing at £182m. The latter figure is actually down significantly versus the £327m reported in 2021.

However, it’s worth noting that 2021 was an exceptionally good year for financial institutions and the stock market in general. As such, it’s not a particularly meaningful comparison in my eyes. What’s more, profits continue to be hampered by restructuring costs of £64m. Although that is down from the £85m booked a year ago, which is an encouraging sight, I feel.

While normalised profitability is difficult to discern, the group’s products seem to be performing in line with client expectations. In fact, between January 2021 and July 2022, the group’s PruFund Growth Fund achieved an impressive return of 16.9%.

Meanwhile, 61% of M&G’s wholesale funds are in the upper two performance quartiles within the last three years.

Needless to say, this is all rather positive. And providing the group can continue to make solid financial and operational progress, then today’s lower valuation certainly makes M&G shares look like they’re trading at a discount.

However, there are some risks to consider first.

What are the main risks?

Management’s ability to hit its promised milestones is an encouraging sight and signals talented leadership. But that doesn’t necessarily guarantee long-term success.

It’s important to point out that as an investment services business, the company is highly dependent on client inflows of capital. And since most individuals keep their investments on a short leash, foolishly or otherwise, it can create some severe problems for M&G shares if the company’s funds fail to meet client expectations.

This threat is only exacerbated by the vast amount of competition within this industry. After all, if M&G’s funds can’t deliver, there’s very little stopping a client from jumping ship to a competitor’s fund.

That means the company has to attract and retain top-tier investing talent that can be quite rare and expensive to come by.

I’m also not too fond of the group’s dividend policy. While I do love the prospect of my portfolio generating passive income through dividends, I am wary of companies that sacrifice growth to do so. And when looking at M&G shares, that’s the impression I’m getting. After all, management has so far returned the equivalent of 35% of the group’s market capitalisation back to shareholders.

If the group can’t expand operating profits meaningfully in the near future, maintaining this level of payout will undoubtedly be challenging.

Should I invest £1,000 in M&G shares right now?

All things considered, this business seems to be in a fairly strong financial position. But how does the valuation look?

From a price-to-earnings PE ratio perspective, M&G shares trade at a whopping multiple of 60. That’s pretty high, considering the UK stock market average is usually around 12 to 14. But as I mentioned earlier, profits are being hampered by restructuring costs. So, this may not be the best valuation metric to rely upon.

What about the price-to-book PB ratio? This is where things start to get a bit more reasonable, with the group trading at a 0.96 multiple. That’s lower than some of its rivals and peers, suggesting the stock is potentially undervalued.

So does this mean I’m looking at a golden opportunity to buy M&G shares?

Maybe. But it’s not one I’m interested in capitalising on. Personally, I feel there are far better investment opportunities elsewhere for my portfolio, which seem lower risk.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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