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FTSE investment management giant Man Group (LSE: EMG) is not a household name. But it is known as a powerhouse fund manager in the global financial community.
It looks even more of a powerhouse now after the 17 October release of its Q3 trading statement. This showed a 22% year-on-year rise in assets under management (AUM) to a record $213.9bn (£159.7bn). It was also well ahead of market expectations of a rise to $201.7bn.
Of this increase in AUM, $10bn came from its own investment performance. This marked a 177% leap over Q2’s trading performance. A fund manager’s AUM is largely comprised of new client flows plus investment performance.
Since its strong numbers on 17 October, its share price has risen 11%, which has pushed down its dividend yield. This is because any stock’s yield moves in the opposite direction to its share price, given a constant dividend.
I bought the shares recently to be a key part of my passive income portfolio. This is income generated with minimal effort from me.
Consequently, a stock price rise is not especially useful to me. I could only realise it if I sold the stock, which would be a one-off benefit. I would rather have years of regular higher income from dividends from it.
So, is the dividend headed higher again?
Underpinning any long-term rise in any firm’s dividends (and share price, for that matter) is earnings growth.
Basically, increased earnings provide a greater pool of cash to firms to pass on to their shareholders.
A risk to Man’s earnings is not increased volatility in the markets, as some investors may think. Greater volatility allows for greater profits if a firm’s traders know what they are doing. I know, as I was a senior investment bank trader for several years before becoming a private investor.
Instead, the main risk I see is a credit squeeze of the same type that sparked the 2007/2008 financial crisis. This was initially caused by defaults in big credit markets that caused liquidity in the financial system to dry up.
That said, analysts currently forecast that Man’s earnings will grow by a very strong 35.7% a year to end-2027.
They also project that the firm will raise its dividend to 13.9p next year and 14.9p in 2027. This would give respective dividend yields of 6.7% and 7.2%. At present, the yield is 6.3%.
How much passive income could it make?
Investors considering a £20,000 holding in the firm would make £21,000 in dividends after 10 years.
This is based on the average 7.2% yield and on the dividends being reinvested back into the stock (‘dividend compounding’).
On the same basis, the returns would rise to £152,307 after 30 years.
With the initial £20,000 investment included, the total value of the holding would be £172,307 by that stage.
And that would deliver an annual passive income (from dividends) of £12,406.
My investment view
Given these projections, I am more than happy to keep my recently bought Man stake.
In fact, I may well increase it again soon, depending on how the rest of my passive income portfolio performs.
And for other investors, I think it well worth considering as a high-yielding dividend asset.
