M&G’s dividend yield is around 10% — and the share looks cheap!

When it comes FTSE 100 income shares, hard to beat IM&G (LSE: MNG) for yield. Currently, M&G’s share yield of 9.8% means it is among the most profitable stocks in the blue-chip index.

Not only that, but the price seems cheap to me too.

Currently, M&G trades at an earnings ratio of 28. Admittedly, that may not seem like much of a benefit. But if I leave earnings aside and look at the company’s potential to generate cash flow, I think its £4.8bn market capitalization is low.

After all, in recent years the company has paid out hundreds of millions of pounds a year in dividends and has used cash to buy back shares over the past few years. I think its proven business model can continue to generate excess revenue.

That could support the dividend. M&G’s stated dividend policy is to maintain or increase its dividend per share each year, although whether it can continue to do so in practice will ultimately depend on its business performance.

Looking at high yield from a critical perspective

Now, while I see a 9.8% yield as something to like, a higher yield (more than double the FTSE 100 average in this case) could be a warning that the City has concerns about budget sustainability.

In the case of the M&G, I see several dangers. Another is that policyholders may take more money out of the asset manager than they put into it. Without it Gems business, that was the case in the first half of the year.

Another risk I see is that a general recession could hurt asset managers more broadly, including M&G. In fact I think concerns like that help explain why M&G, despite its huge profits, continues to trade at what I see as a cheap price. In fact, shares are 10% cheaper now than they were five years ago.

Why am I holding back?

I have no plans to sell my M&G shares. At the current price, I think M&G is a dividend that investors should consider.

It has proven that it can make huge sums of money. That is not a coincidence, but reflects the strategic decisions the company has made over time. It operates in a sector that benefits from high long-term customer demand. Within that space, it has deep expertise, a recognized brand and a customer base in the millions.

All that helps M&G make cash. Money generation and income are not the same thing. Profits are an accounting concept and for an asset manager like M&G they can reflect temporary changes in asset prices. So I prefer to look at whether such a company can make excessive profits in the future.

In the case of the M&G dividend machine, I think the answer is yes.