During the Monday session on the London stock exchange, the shares of M&G PLC (MNG) have gained 4%. The to previously closed at 151.50p, yet today it has reached 158p.
The move came right after the senior management change. According to the marketscreener.com, Fiona Rowley has worked for M&G for 27 years. After such a long service the co-manager of the company’s real estate fund decided to step down.
In accordance with the succession rules, Justin Upton, who has worked with her for several years, will take her place. As the same source suggests, the new portfolio co-manager stated:
“In a changing economic environment with record low-interest rates, a steady income stream is now more important than ever. My key focus will be to maintain a healthy income distribution for our clients and customers, whilst managing higher levels of liquidity against the current uncertain backdrop of COVID-19. I will also seek to ensure the fund is well-positioned to take advantage of the demographic and technological changes we are witnessing in society and the economy.”
M&G is essentially an investment and savings business. The firm has more than 5 million clients across the world, with the capital under management reaching £352 by the end of 2019. The property division of the company manages £33.5 billion, so it roughly represents 9% of the entire business, which might not seem a significant portion of the business. However, it goes without saying that having tens of billions of pounds under management is a great responsibility indeed. Therefore, the M&G group as a whole can certainly benefit if its real estate arms perform well.
Challenges of Low Interest Rates
One of the most important challenges facing the company is to deliver decent returns to income investors. Obviously these tasks were not so complicated before 2008 since investors and institutions could earn 5% to 6% from bank savings accounts, as well as bonds. Yet, since the great recession, several central banks reduced their rates dramatically, with Bank of England eventually dropping rates all the way down to 0.5%.
Despite those problems, there still were some decent opportunities in the aftermath of the 2008 crisis. Some central banks have started to raise rates after some years from this event. At the same time, some central banks kept rates at quite decent levels. For example, the Reserve Bank of Australia even managed to increase its cash rate to 4.25%. So this gave savings and investment businesses like M&G PLC an opportunity to earn some decent return on some currency deposits.
The arrival of the COVID-19 pandemic has essentially eliminated those opportunities. After reaching a multi-year high of 2.5%, the US Federal Reserve cut rates to 0.25%, the European Central Bank already kept rates at 0%, even formerly high-yielding currencies, like the Canadian dollar, Australian dollar and New Zealand dollar now only yield 0.25%. Finally, in response to the economic effects of the pandemic, the bank of England has reduced its rates to 0.1%.
Obviously at some point in the future, most likely the economic conditions will improve, and at least some central banks can raise interest rates and offer more competitive rates for savers and investors. However, at the moment the fact is that mutual funds can not earn any decent returns from deposits or even government bonds.
Consequently, when it comes to income investing, M&G and other similar companies are mostly left with two obvious alternatives. The first option is to invest in dividend-paying stocks, this can be a decent long term strategy, however, in order to minimize risks, fund managers always try to diversify across the asset classes. This is exactly when the real estate management arm of the company comes into play. Despite the near-zero interest rates across the country, there are still some decent rental yields available in some residential areas. So this gives firm management an ability to capitalize on those opportunities and deliver results for its investors.
Share Price Performance of M&G and Dividends
M&G PLC shares made steady gains from late 2019 until February 2020, rising from 200p to 250p. However, just like in the case of so many stocks, it collapsed during March 2020 and at one point even fell below the 100p level. After 2 subsequent months of stagnation, the stock broke above 125p level decisively during May 2020 and nowadays trades just below 160p level.
According to CNBC, the current earnings per share (EPS) indicator of the firm stands at 40.9p. This means that the price to earnings (P/E) ratio of the firm is around 3.9. This suggests that the stock can be significantly undervalued. The company’s total annual payout to its shareholders stand at 11.92p. Consequently, the dividend yield of the stock is close to 7.5%. It goes without saying that when nearly all major central banks are keeping their rates within 0% to 0.25% range, this rate of return indeed seems very attractive. In fact, it is more than 2.5 times higher than the average inflation rate in the United Kingdom.
The only question here is whether the company will be able to sustain those payments. To answer those types of questions, we can take a look at the payout ratio of the firm. This indicator currently stands at close to 56%. This suggests that the company still has more than enough margin of safety to keep up with those payments, even if its earnings decline to a certain extent. The only problem here is the fact that the company does not have such a long track record of returning money to shareholders, as many solid dividend-paying stocks. So it is viable, that the management might decide to cut those payouts if the economic conditions worsen. At the moment M&G shares have quite an attractive dividend yield, however, for those income investors looking for safe income, there can be some better choices.
However, in terms of growth investing, if the current management manages to withstand the current economic downturn, the stock has a potential for significant appreciation.