3 reasons the 8.8% M&G dividend yield looks safe to me

As an investor, I always try to remember that no dividend is safe. Sometimes it’s hard to imagine a company cutting its dividend – but then. I have it shell Shares in 2020 when the company suddenly cut its payout for the first time since the war. So, what’s up M&G (LSE: MNG), the company I currently hold in my portfolio? M&G’s dividend yield of 8.8% is very attractive to me. But can it last?

Here are three reasons I can – and one risk I see.

big stock buyback

Last March, the company announced a sizable share buyback program that had ended.

The company spent half a billion mina to buy back its own shares. That equates to just over 10% of the current market capitalization.

That doesn’t seem to have boosted the stock price, which is only 2% higher than a year ago. But with so few shares in circulation, the company can pay the same dividend as before, or even higher, without much cost.

Spending half a billion pounds on buybacks is a sign of strong management confidence. If the company has enough money to fund the program, this increases my confidence in the safety of the dividend.

Dividend policy

In addition, the company has a dividend policy to maintain or increase its annual payout.

That is never guaranteed. But if the management cannot implement it, the shareholders will express their dissatisfaction. That could cause executives to lose their jobs.

Management understands the importance of this. At the end of last year, it was emphasized: “We also promised our shareholders a stable or increasing dividend policy, and we have kept that promise during the pandemic“.

So, if the company doubts that it can maintain the payment in accordance with the policy, I would expect a change in the dividend policy, just like the house builder. persimmon last year.

Now a policy is a policy. I think the Management is confident that they can maintain the dividend.

Stock price support

Since demerging from Prudential in 2019, M&G has often felt like an unloved child.

The share price is now 7% lower than it was today, despite the company offering one of the highest yields among members of the FTSE 100.

I think the yield helps support the stock price. If M&G’s dividend is cut, I would expect many income investors to ditch it – and could see the stock drop.

This alone makes me think that maintaining the dividend is a top management priority.

A risk I see

But dividends must be funded. Last year, post-tax profit was £92m but dividend payments cost the company £466m.

Fluctuations in stock values ​​can mean asset managers see reported earnings fall even when the underlying business’s performance is stable. So for now, I am not worried about the dividend coverage and plan to continue holding my shares.

But I understand that the dividend depends on the company successfully overcoming risks like volatile markets. They can lead to investors withdraw funds and profits fall.

I am optimistic that companies can manage these risks. I’m really hoping for a modest dividend increase when the company publishes its final results next week.