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As an investor, I always try to remember that no dividend is completely certain. Sometimes it seems hard to imagine a company cutting its dividend, but then it does. I had Shell shares in 2020 when the company suddenly cut his pay for the first time since the war. So what about M&G (LSE: MNG), a company that I now have in my portfolio? M&G’s 8.8% dividend yield definitely appeals to me. But can it last?
Here are three reasons why I think it can, and one risk I see.
Buyback of large shares
Last March, the company announced a major share buyback program that it has already completed.
The company spent £500m buying back its own shares. That equates to just over 10% of its current market capitalization.
That doesn’t seem to have boosted the share price, which is only 2% higher than a year ago. But with fewer shares outstanding, the company can afford to pay the same dividend as before, or even a higher one, without costing as much.
Spending half a billion pounds on a buyback is a sign of strong confidence in management. If the company has enough extra cash to fund such a program, that increases my confidence in the safety of the dividend.
dividend policy
On top of that, the company has a dividend policy of maintaining or increasing its annual payout.
That is never guaranteed. But if management doesn’t comply, shareholders would express their discontent. That could lead to an executive losing his job.
Management understands the importance of this. In last year’s final results, he emphasized: “We also promised shareholders a stable or increasing dividend policy, and we have kept that promise during the pandemic.”.
So if the company doubts that it can keep paying according to policy, I would expect it to signal a change in dividend policy, like the homebuilder. Khaki did last year.
For now politics is politics. I think that suggests that management is confident that it can sustain the dividend.
Stock Price Support
Since he separated from Prudential In 2019, M&G has often felt like a loveless child.
Its share price is 7% lower now than it was then, despite the company offering one of the highest returns among members of the FTSE 100.
I think the performance helps support the stock price. If M&G’s dividend were to be cut, I would expect many income investors to drop it, and that could send the stock tumbling.
That alone makes me think that maintaining the dividend is high on management’s list of priorities.
A risk that I see
But the dividends need to be financed. Last year profit after tax was £92m, but paying dividends cost the company £466m.
Stock value fluctuations can mean asset managers see their reported earnings fall even when underlying business performance is strong. So for now, I’m not worried about dividend coverage and I plan to continue to hold my shares.
But I recognize that the dividend depends on the company successfully navigating risks like choppy markets. They could lead investors to withdraw funds and profits to fall.
I am optimistic that the company can manage such risks. In fact, I expect a modest dividend increase when the company releases its final results next week.
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