MGPUF - M&G: Benefits From Higher Rates

2023-12-10 05:04:17 ET

Summary

• M&G benefits in several ways from higher rates due to its previously run-off insurance businesses.
• The company has a generous dividend policy, that should be used as a measure of their underlying profit yield, which we think can be enduringly supported and grow a little.
• While the underlying AM business is nothing to write home about, the exposure to higher rates, which we expect to remain structurally higher over the next decade, is a plus.

M&G ( MGPUF ) in the HY 2023 sees the full effects of a higher rate policy on the company profits. Also, worth calling out are the growing savings benefits being targeted by the company that could meaningfully increase the yield from the business if all goes to plan. In terms of AUM, things are pretty flat. Its performance is really all coming from the insurance side of the business. Using the dividend yield as a proxy for underlying economic yield, even with cuts priced in most global fixed income markets, things look good on balance for M&G.

Key Earnings Points

• AUM has gone slightly down , so performance on their fixed income funds and the majority of their vehicles has not been the driver of the pretty substantial 31% growth in operating profit this HY compared to last.
• In addition to the more typical AM businesses, M&G has an insurance portfolio that for a time was in run-off . This has incidentally changed recently, with the company beginning to enter into various insurance-esque transactions. But even the running off portfolio until now has been able to generate substantial returns due to sudden increase in performance of the related reserve portfolios, as well as performance of related with-profits funds on top of other proprietary capital.
• Around 20% of the total ~100 million GBP in growth came from offsets to corporate expenses and the rest came from the Heritage insurance business, both driven by higher interest rates.

Bottom Line

For this sort of businesses with substantial AM income, it's useful to just take the dividend yield as a proxy for earnings yield for these companies, since it's difficult to track after tax profits. The dividend yield is above 9%, and in general, the dramatically higher rate environment is definitely a net benefit for the business. Higher dividends could be in store, and in general we think that the environment for M&G has structurally improved compared to before. With the payout policy to grow or keep the dividend stable, not a variable policy, we think the yields are on the way up and would be paying at an attractive rate relative to the risks that the company faces.

Ultimately, some of the key risks of AM commodification and being in front of general market trends which still are plagued by recession risks and concerns around stickiness of inflation, not helped by market jubilance which actually loosens credit conditions and makes the situation of inflation worse, are mitigated to an extent by the company's exposure to fixed income funds. AUM has been stable in a relatively tough market environment this and last HY.

What's key is this exposure to rates, which we do think will remain structurally higher as a result of generally higher levels of economic nationalism and other supply-side inflationary trends - including broad-based demographic decline in productive nations. This should support higher payouts and renders M&G pretty attractive, and a good opportunity of a spin-off opportunity having been left behind by markets, regarded as the dead skin of Prudential ( PRU ).

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