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Are Magellan shares an underrated buy with a 10% dividend yield?

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The Magellan Financial Group Ltd (ASX: MFG) share price was one of the strongest performers this week after reporting its recent result. It rose 12% after releasing the numbers.  

The fund manager is benefiting from the ongoing growth of its investments in fund manager Vinva and particularly investment bank Barrenjoey.

While Magellan’s operating profit was flat and statutory net profit was down 27%, the partnership income (from its investments) rose 109%.

Let’s take a look at what experts thought of the result.

UBS view on the numbers

The broker noted that the associate profits are now “becoming a more meaningful earnings driver” than the investment business.

While revenue pressure in the funds management side of the business, it’s expected to see profits continue to decline. UBS thinks the market will place greater focus on the value of its associates and liquid assets.

Magellan’s operating profit was around 20% stronger than what UBS was expecting and it was a similar bang for the dividend per share too. This was despite the core investment business missing on expectations because of lower net client revenue and a greater compression of management fees due to an expected shift of the mix of earnings, increased client rebates and repricing.

The contribution from associates was $25.7 million compared to the $20 million expectation by UBS. The Barrenjoey contribution increased by $10.5 million year-over-year.

Looking at the earnings composition, UBS noted that the partnership division contributed 54% of the operating result, which exceeded the core investments divisions.

What does the expert think of the Magellan share price?

UBS thinks that the principal investments and liquid assets underpin around 80% of Magellan’s valuation.

The broker also said:

Long term, we see ‘core’ Investment Management operating profit share reducing to 30% of the mix by FY30. Nevertheless, while the medium-term earnings outlook overall continues to display net profit headwinds, we expect the multiple re-rate away from a distressed fund manager to a higher multiple principal investor will be more gradual – at least until there is evidence that Investment profits have largely rebased and there is greater earnings visibility around more opaque B*/vinva profitability.

The broker has a neutral rating on the fund manager, with a price target of $9.90. That implies a possible rise of 8.5% over the next year.

UBS also forecasts that the business could deliver an annual dividend per share of 66 cents in FY26, translating into a potential grossed-up dividend yield of 10.3%, including franking credits.

The post Are Magellan shares an underrated buy with a 10% dividend yield? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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