Spun off from insurance group Prudential at the end of October, M&G is a new business with a long history. The company can trace its roots back to 1848 and has been managing money for investors across the UK ever since. 

Business breakup

Following the spin-off, M&G is today made up of Prudential’s UK insurance and asset management businesses. The remaining Prudential business consists solely of the insurer’s Asian and US companies. 

City analysts believe this Asian business has brighter prospects. The UK insurance and asset management industry is relatively mature, with hundreds of asset managers fighting for market share. M&G is also struggling to fight back against the rise of low-cost passive investment trackers. Its retail asset management business lost a net £3.8bn in the first half of 2019 alone.

Still, despite these pressures, the group remains a force to be reckoned with in the asset management industry, and its size is possibly the company’s most significant advantage. M&G is the UK’s third-biggest listed fund business with £341bn in assets.

Income champion

Following the split, City analysts believe M&G has the potential to report a total net profit of £1.1bn for 2019, falling to £700m for 2020, the company’s first full year as an independent business.

As the figures for 2019 are likely to be distorted by divorce costs, I think the numbers for 2020 are a more reliable indication of M&G’s prospects. 

On this basis, the stock is trading at a forward P/E of 8.2, which looks cheap compared to the rest of the asset management sector. The rest of the industry is trading at a median P/E of 14.

On top of this highly attractive valuation, City analysts reckon the firm has the potential to become an income champion as well. Estimates for how much money the company will distribute to shareholders over the next two years vary, but on average, City analysts are forecasting a total distribution of 15.3p per share for the 2019 financial year, and 18.4p for 2020. That gives an overall potential distribution of 33.7p the next 18 months, or a yield of 14% on the current share price.

Over the medium term, analysts are expecting the company to distribute around two-thirds of earnings, which suggests investors can look forward to a dividend yield of 8% on the current share price for the foreseeable future. 

The bottom line

So all in all, it looks to me as if M&G is a tremendous long term income investment, and there’s also the potential for substantial capital gains if the stock’s valuation rises to meet the rest of the sector. 

In fact, if it does, I think there is a good chance shares in M&G could double investors’ money over the next few years with a combination of income and capital growth. 

The post No savings at 40%? I’d buy this FTSE 100 dividend stock yielding 8% right now appeared first on The Twelfth Magpie.

More reading

• Here’s how I’m targeting £9,945 a year in second income from this overlooked FTSE gem
• How has M&G become one of the FTSE 100’s hottest dividend stocks? 5 reasons..!
• This stunning FTSE 100 dividend stock just doubled my money in 3 years – time to buy more?
• A handful of 5%+ yielding UK shares worth considering for a Stocks and Shares ISA
• Here’s how an empty ISA today could be earning £19,343 in passive income annually just a decade from now!

Rupert Hargreaves owns shares in M&G PLC and Prudential. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Specialist business 

Phoenix is a relatively unique business. The company specialises in buying up old books of life insurance other companies no longer want.

The group fills a gap in the market. Life insurance is a challenging business with strict rules and regulations, which means many companies want out. Phoenix is more than happy to take on this business because it can do so at much lower costs.

By specialising in managing old books of life insurance, the company has been able to streamline its processes and operate at a much lower cost than those selling to the firm.

For example, last year, the company bought up an old book life insurance policies from Standard Life Aberdeen. Initially, management expected to be able to achieve £720m in synergies from the deal. However, several months after the merger completed, Phoenix’s estimate of merger synergies jumped to £1.2bn. That’s thanks to changes to IT systems and combining the bolt-on book of business into the rest of Phoenix’s operations under one legal umbrella.

Earlier this year, management predicted that, as Phoenix runs down its books of life insurance, it will generate £3.8bn of cash between 2019 and 2023. Most of this money is earmarked to be returned to shareholders. On current forecasts, the stock will pay out a dividend yield of 6.2% in 2019 and 6.3% in 2020. Based on its cash generation forecasts, I expect the dividend to remain at this level for the foreseeable future.

Future income champion

Another company I think has a bright income outlook is M&G Plc (LSE: MNG). M&G has only been an independent business for two weeks, but analysts are already expecting big things from the enterprise.

M&G and Phoenix have a lot in common. They both have life insurance businesses, which are in the process of being run off. M&G also has an asset management division, which has much better profit margins.

City analysts believe the firm has the potential to yield as much as 8.2% for 2020, which will be its first full year as a listed company.

Only time will tell if the business will be able to hit these forecasts, but I’m not going to bet against M&G. According to management projections, the dividend yield of 8.2% will be covered 1.5 times cash generated from operations, that’s excluding any growth that emerges during the next 14 months or so.

In my opinion, growth is a free option here. The market seems to be valuing the business on what has happened rather than what could happen.

The stock is currently trading at a forward P/E of just 7.5, around half of the sector average, implying it could jump by as much as 100% if growth surpasses expectations. In the meantime, investors have that market-beating dividend yield to look forward to.

The post 2 big FTSE 100 dividend stocks I’d buy to beat the State Pension today appeared first on The Twelfth Magpie.

More reading

• Here’s how I’m targeting £9,945 a year in second income from this overlooked FTSE gem
• How much would I need to invest in this FTSE 100 dividend star to aim for £15,401 a year in second income?
• How has M&G become one of the FTSE 100’s hottest dividend stocks? 5 reasons..!
• This stunning FTSE 100 dividend stock just doubled my money in 3 years – time to buy more?
• A handful of 5%+ yielding UK shares worth considering for a Stocks and Shares ISA

Rupert Hargreaves owns shares in M&G Plc and Standard Life Aberdeen. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.