This FTSE 100 gem, which yields a dividend of 9.5%, looks like a real bargain at the moment!

Very little action in FTSE100 generate an annual dividend yield in excess of 9%. The average annual payout of the leading index is currently just 3.6%.

And even fewer of them seem undervalued by more than 50% compared to others, by my estimate.

Add to that the additional requirement of projected annual profit growth of over 25%, and the list becomes very short indeed.

One of the companies on the list is a global investment manager M&G (LSE:MNG).

Stock valuation

On the key price-to-book (P/B) metric, M&G shares are currently trading at just 1.3. That’s the lowest among its peers, whose average P/B is 3.7.

The same goes for M&G’s relative position in terms of the stock’s price-to-sales (P/S) ratio. It currently trades at 0.8 compared to its peer group average of 4.4.

So that’s a serious deal on these funds. To find out exactly how much in cash, I ran a discounted cash flow analysis.

Using data from other analysts and my own, we can see that the shares are 51% undervalued at their current price of £2.07.

So a fair share price would be £4.22, although it could be lower or higher.

Dividend yield

In 2023, M&G paid a total dividend per share of 19.7%, giving a current yield of 9.5%.

So £9,000 – the amount I started investing 30 years ago – would have given £855 in dividends in the first year. Over 10 years, at the same average yield, that would have risen to £8,550, and over 30 years to £25,650.

However, if the dividends were used to purchase more M&G shares (so-called dividend capitalization), one could earn significantly more.

More precisely, at an average yield of 9.5%, an additional £14,185 would have been generated after 10 years, not £8,550. And after 30 years on the same basis, an additional £144,854 in dividends would have been generated, not £25,650.

At this point, your total investment (including your initial £9,000) would be generating a dividend income of £14,616 each year!

Growth prospects

H1 2024 results showed a 4% year-on-year decline in adjusted operating profit to £375m from £390m, with the company attributing this to challenging market conditions during the half-year.

On a more positive note, from my perspective, it has made progress on its key Transformation programme, which aims to increase financial strength, simplify operations and unlock growth.

First, the Shareholder Solvency II coverage ratio has been increased by 7% to 210% in H1. Second, managed costs have been reduced by 4%. Third, the Life and Wealth operations have been combined to accelerate growth in the UK retail market. There are also plans to launch a new investment fund in the Middle East soon.

There is a risk that the Transformation program will stall for some reason. Another is the high level of competition in the sector, which is squeezing its profit margins.

However, analysts estimate that the company’s profits will grow by 25.7% annually until the end of 2026. Forecasts also say that the dividend yield will increase to 10.1% by then.

Will I buy shares?

I already own M&G stock because of its high yield, extreme undervaluation, and excellent growth prospects. With all of these factors still in play, I will be buying more soon.