9% yield! Should I buy this FTSE 100 dividend stock in February?

Of all the financial data investors consider, high dividend yields can be very attractive. With the uncertainty in today’s market, receiving guaranteed cash back can be a good idea. But is it really worth it? I’ll be researching dividend stocks with great 9% returns to see if I should buy them this February.

What is that?

M&G (LSE: MNG) is a global asset manager based in London, providing active investment across a range of asset classes. It manages over £308bn of assets in equities, multi-asset, fixed income, real estate and cash across the UK, Europe and Asia.

The company split from Prudential in 2019. It later acquired Sandringham Financial Partners, and digital wealth management platform Ascentric from competitor Royal London.

Is it worth investing in?

When considering the company as an investment, a 9% yield is hard to ignore. Now it is one of the highest of all FTSE 100higher than average yield of 4.1%.

However, when looking at dividend-paying investments, market performance and company fundamentals should also be considered. In the past three years, the share price has fallen 13%, lagging far behind the financial services sector. Even if dividend returns are included, an investment in the company will yield 20%. That is still behind the return of 27% of the sector.

Looking at the company’s bottom line, the first red flag is that revenue is now negative, resulting in losses at an increased rate of 49.7% over the past five years.

Another potential problem is that current debt is higher than operating cash flow. This means that the company owes 15% more per year than it produces.

Since one of the main attractions for investors is high dividends, a negative dividend payout ratio is a real problem. With no profit, the company is forced to cover dividends with debt. This means that with rising interest rates, this could quickly become unsustainable.

What is the price?

When considering M&G’s fair value using a discounted cash flow model, it appears the company is currently overvalued by about 10%, with a share price of 208p above its fair value of 189p.

However, financial services can be a difficult group of companies to assess. Since returns on investment vary significantly, analyzing a company’s fundamentals may be less of a guide than in a company with a more predictable operating model.

Analysts expect the share price to rise by around 5% in 2023. This is due to a huge 84% growth forecast, but not far from the sector average of 64%.

Totally

It is clear that a high dividend yield does not guarantee a company with a quality foundation. For a good investment, the overall performance of the company’s stock price and its potential should also be understood.

If M&G can turn a profit over the next three years, as analysts expect, it could be an attractive long-term investment. However, on that negative basis, and in an economy that doesn’t favor unprofitable companies with high growth expectations, I wouldn’t take that chance.