Magellan Financial Group Ltd (ASX: MFG) shares have gone down a long way over the past year, but the dividend yield could still be very high, leading to impressive passive income.
It's not so good for long-term holders which have seen significant destruction of the value of their shares. Magellan has cut its dividend significantly compared to a couple of years ago. But, for new investors, they can get the yield at this lower starting point.
But, keep in mind that the dividend isn't everything. Investors should think about what the share price might do as well – there's not much point getting a 5% dividend yield if the share price permanently falls over 10%.
We'll consider the outlook after looking at the Magellan dividend forecast.
Magellan passive dividend income expectations
Magellan says that strong cash flows allow the business to have a dividend payout ratio of 90% to 95% of the fund's management profit. In the FY23 half-year result, it generated $90.1 million of operating cash flow during the half-year. It also has no debt.
The fund manager generated adjusted earnings per share (EPS) of 53.6 cents per share and decided to declare an interim dividend of 46.9 cents per share. That payment represents a dividend yield of 5.7%, excluding the effect of franking credits.
Commsec estimates suggest that Magellan is going to pay an annual dividend per share of 81.3 cents. That represents a dividend yield of 9.9%, excluding franking credits. However, that does suggest that the final dividend is going to be smaller than the interim dividend.
In FY24 Magellan's dividend could be 59.9 cents per share, according to Commsec, suggesting that a big dividend cut is expected in the next financial year. That would translate into a dividend yield of 7.3% before franking credits.
In FY25, the Magellan dividend is estimated to be 55.1 cents per share, which would be another reduction. This would translate into a dividend yield of 6.7% excluding franking credits. That's still a fair amount of passive income.
Can the Magellan share price rebound?
Magellan has gone down a long way. Since 2 July 2021, it's down over 80%. It would have to be an incredible turnaround to recover all that lost ground.
Just getting back to $10 would be a start. It's certainly priced on a cheap price/earnings (P/E) ratio. Commsec numbers show it's valued at around 10 times FY24's estimated earnings.
But, if earnings keep going down, then Magellan's share price is unlikely to rebound noticeably, in my opinion.
Magellan's funds under management (FUM) keep falling as its investment funds haven't yet delivered much outperformance to stop the outflows. Unless the earnings stop falling, the dividend may keep falling.
The company has a few points of how to regain momentum: stabilise and improve its core funds management performance, launch new products, add new and complementary capabilities with acquisitions, disciplined capital and cost management, and its people. But, it may be easier said than done.
Magellan also noted that it had $882.4 million in cash, financial assets and investments in associates at 31 December 2022.
Whilst it could turn things around, it wouldn't be at the top of the list of low P/E ASX shares that I'd want to buy because of the headwinds that high-fee active managers are facing.
