When looking for FTSE shares to buy, there are a few things I check (among others):
- How’s the balance sheet and is the company performing well?
- Is the stock undervalued at the moment?
- Does it pay reliable dividends?
I noticed recently that global investment management firm M&G (LSE: MNG) potentially ticks two of these boxes. It’s down 14% since a yearly high of 238p in March and has a 9.6% dividend yield.
So, is the company performing well and should I consider it for my portfolio?
Reliable dividends
The high yield is attractive but before I jump in I want to dig a little deeper. Checking the history of dividend payments can give me a better idea of whether I can expect them to continue.
Since M&G only recently started paying dividends, it doesn’t have a long track record. However, payments have been consistent since 2019 and have increased in that time. Starting at 11.9p a share, they’ve increased to 19.7p over the past five years. That isn’t sufficient to convince me they will continue uninterrupted — but it’s a good start.
M&G demerged from Prudential in 2019, which explains the short history. Before 2019, Prudential paid consistent and increasing dividends, so there’s that. It doesn’t necessarily mean M&G will do the same, but it helps.
Valuation
Using a discounted cash flow model, analysts have calculated the stock to be undervalued by 48%. This uses future cash flow estimates to gauge what the shares could be worth.
It doesn’t necessarily mean the price will rise. But if estimates of future cash flows were low and the stock appeared overvalued, potential investors might be put off.
Another good valuation metric is the price-to-earnings (P/E) ratio. Using trailing data, M&G’s price is currently 16 times earnings. That’s slightly above the industry average but on par with its closest rivals.
However, the forward P/E ratio is more telling. With earnings expected to increase by 57% in the next 12 months, this metric drops to 10. That’s a fairly good indication that the current price could be undervalued with growth potential.
The game of risk and reward
All valuations use a certain amount of historical data and rely on conditions remaining constant, which seldom happens in real life. A change in regulations, political upheaval, unexpected blips in the economy. All of these things could make current estimates irrelevant.
But when evaluating stocks, analysts have to work with the data they have to reach the best possible conclusions. There’s always an element of risk — and a potential reward.
My verdict?
Despite M&G’s brief history in its current form, it’s previously been a part of a company with a long history in the UK. Its balance sheet isn’t perfect — £8bn in debt is a lot for a company with a £4.9bn market cap. But earnings look good and the share price has remained consistent at around 200p for four years. So price-wise, I don’t expect much growth.
If it weren’t for the yield, the stock would probably fly under my radar. But with that factor on board, I think it could make a good addition to a dividend portfolio.
I’m still on the fence but I’m adding it to my shortlist of potential shares to buy in August.
This post was originally published on Motley Fool
