Investor' Champion18 Feb 2023 15:15
Dated 30/1/23 Paid for tip site
hxxps://www.investorschampion.com/channel/portfolio/income-boosters-2-new-dividend-shares-for-2023
New stock #2: 10% yield
Our second new stock is FTSE 100 asset manager M&G (LON: MNG). This business was spun out of Prudential in late 2019. It's since delivered a solid record of capital generation to support its 9.5% dividend yield.
Much of the group's surplus cash is generated by its Heritage business, which runs with-profits funds. These are closed to new business, but are expected to provide a stable earnings contribution until 2029, or possibly beyond.
Alongside this, the business has a portfolio of open savings and investment products that are marketed to retail savers and institutional clients. Assets under management totalled £349bn at the end of June last year. This included £77bn of private and alternative assets. According to the firm, the majority of these generate income from management fees rather than performance fees. This should help to reduce earnings sensitivity to market movements.
Performance during the first half of last year was cautiously encouraging, given the difficult environment. M&G's open businesses reported net inflows of £1.2bn. This included a £0.8m inflow to its wholesale business -- the first since 2018.
Most listed asset managers are looking unloved at the moment, typically for this point in the cycle. Their profits are a leveraged play on asset values -- when markets go up, both inflows and asset values rise, providing a double-barrelled boost to fee income. When markets fall, however, the opposite tends to happen.
Having said that, the 9.5% yield on offer here is still one of the highest in the sector. This suggests the market has concerns about either M&G's growth potential or the sustainability of its dividend.
In our view, the main risk is that the company's open businesses might not generate sufficient growth to offset the gradual run-off of the Heritage division. That could put the dividend at risk.
However, we're encouraged by progress made under departing CEO John Foley and feel that M&G's brand, scale, and improving asset performance provide a reasonable foundation for future growth.
Although the Income Boosters already holds another well-regarded asset manager, we feel the income available from this sector at present justifies additional exposure.
M&G has been added to the Income Boosters at 207p.
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