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M&G (LSE:MNG) is a popular pick among income investors and for good reason. The FTSE 100 asset manager has a forward dividend yield of nearly 10% that makes it one of the highest-yielding stocks in the UK large-cap index.
But despite this compelling income potential, I’m staying on the sidelines for now.
What’s going on with the M&G share price?
The company reported its half-year results yesterday and it was a bit of a mixed bag for investors. Operating profits jumped 28% to £390m for the period ended 30 June, but this fell short of consensus estimates of £414m.
Positive net inflows, however, was good news following a series of outflows in recent quarters. The M&G share price climbed 2% higher to close at £2.61, which represents a gain of 22.5% in the past year.
On the cost side, the company announced a 200-basis point reduction in its cost-to-income ratio to 75% and expects to continue improving operating leverage through cost discipline and top-line growth.
That’s good news for shareholders who will be keeping a close eye on stability and cash returns in the periods to come.
Valuation
Valuation-wise, M&G certainly looks cheap at first glance. It trades on a forward price-to-earnings (P/E) ratio of just over seven and a price-to-book (P/B) ratio of 0.85. On these metrics, the shares seem to offer good value — especially with a tasty dividend yield of 9.7%.
But let’s compare that to Legal & General, a close peer in the life insurance and asset management space.
L&G trades on a slightly higher forward P/E ratio of around nine and offers a dividend yield of 8.4%. It’s more expensive on paper but that premium could reflect its more consistent earnings performance and stronger long-term dividend track record.
L&G has also avoided profit misses in recent quarters, maintaining investor confidence in its payouts. And while M&G’s capital position is healthy, its reliance on more volatile fund flows makes earnings less predictable.
My verdict
M&G is a high-yield, low-P/E share with an appealing capital return story but it’s not quite the compelling package for me.
The recent profit miss underlines the fragility of its earnings, and I’d like to see a clearer trend of consistent performance before jumping in.
Legal & General looks pricier by comparison, but I think that may reflect its relative stability and consistency, which is something that investors value in this space.
For now, I think I’d prefer Legal & General as the dependable option within the asset management space, while M&G remains firmly on my watchlist.
With dividend yields approaching double digits, these two companies are among the top dividend payers within the Footsie. I think that alone makes them both worth considering for income investors.
This story originally appeared on Motley Fool
