With the 7% dividend yield, is the Magellan share price a buy?

Could this beaten-up stock be a compelling investment?

| More on:
A man looking at his laptop and thinking.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

At the current Magellan Financial Group Ltd (ASX: MFG) share price, the passive income payout is large enough to offer investors a good dividend yield.

The company has long maintained a high dividend payout ratio to provide investors with an appealing level of passive income. Most of the profit generated each year has been handed straight back to shareholders.

Magellan's policy is to pay interim and final dividends of 90% to 95% of the net profit of its management business and 90% to 95% of net crystallised performance fees after tax.

Before considering if the Magellan share price is attractive at Friday's closing price of $11.26, let's look at the dividend yield.

Created with Highcharts 11.4.3Magellan Financial Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Dividend yield

For FY24, Magellan paid an interim dividend of 29.4 cents per share, a final dividend of 28.6 cents and a performance fee dividend of 7.1 cents. All were franked at 50%.

Those individual dividends totalled 65.1 cents per share for the 2024 financial year. At the current Magellan share price, that annual payout translates to a partially franked dividend yield of 5.8% and a grossed-up (including franking credits) dividend yield of 7%.

Of course, past payouts are not a guarantee of future payouts.

The estimate on Commsec suggests Magellan could cut its total payout to 55.7 cents per share in FY25. Excluding franking credits, that would translate into a dividend yield of approximately 5%.

This is why we shouldn't buy shares in a business solely based on its dividend yield. That yield can crumble if the dividend is cut. The most important question is whether the business and its value are attractive, regardless of the dividend.

Is the Magellan share price attractive?

The Magellan share price has experienced major volatility in recent times. It has climbed almost 76% in the past 12 months. Yet, it's been down 65% in the last three years as funds under management (FUM) slumped and profits dropped.

In FY24 alone, the average FUM dropped 25% to $36.8 billion. The profit before tax and performance fees of the fund's management business also declined 25% to $158.3 million.

Pleasingly, FUM at the end of September had recovered to $38 billion, with an improved investment performance with its funds.

If FUM can slowly but steadily grow, then I believe that will be the key catalyst for Magellan's net profit to improve and help send the Magellan share price higher.

More tailwinds

There are other positives to keep in mind. First, its investment in Barrenjoey is starting to pay off, with the relatively new investment bank making $34.7 million of net profit in FY24, up 40%. Barrenjoey intends to start paying dividends (to Magellan and other shareholders) due to the growth in its earnings, cash generation and capital.

I also think there's merit in Magellan's decision to take a stake in Vinva, which Magellan described as a "high quality, well regarded manager with significant capacity and strong performance". Vinva had approximately $22 billion of assets under management at July 2024.

Magellan sees it as "highly profitable" with "significant growth potential across existing and new products globally." Magellan is partnering with Vinva to accelerate its growth.

I like the moves Magellan has made to diversify its revenue.

Foolish takeaway

According to Commsec, the Magellan share price is trading at around 12x FY25's estimated earnings. If it can grow its overall profit from here, and continue paying large dividends, then this business may be undervalued and could positively surprise.

However, active fund managers are facing significant FUM headwinds from low-cost exchange-traded funds (ETFs), so I'm not jumping to invest in Magellan shares after its rally this year reduced the valuation's attractiveness.

Should you invest $1,000 in Magellan Financial Group right now?

Before you buy Magellan Financial Group shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Magellan Financial Group wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

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.

More on Share Market News

The letters ETF with a man pointing at it.
Share Market News

3 fantastic ASX ETFs to buy with $1,000

These funds could be worth considering if you have money to invest in the share market.

Read more »

Businessman smiles with arms outstretched after receiving good news.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a wonderful Wednesday session for investors today.

Read more »

Two male ASX 200 analysts stand in an office looking at various computer screens showing share prices.
Broker Notes

Macquarie tips 20% upside for this ASX 200 industrials stock

Let's see what the broker is saying about this stock following an update.

Read more »

A man with a wide, eager smile on his face holds up three fingers.
Gold

3 reasons this ASX 200 gold mining giant could soar higher into 2026

A leading expert forecasts more outperformance from this surging ASX 200 gold stock.

Read more »

A young woman lifts her red glasses with one hand as she takes a closer look at news about interest rates rising and one expert's surprising recommendation as to which ASX shares to buy
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

CBA shares hit a new $176 record high. Too late to buy?

What can stop this bank now?

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why James Hardie, Mayne Pharma, Nufarm, and Resimac shares are falling today

These shares are having a tough time on hump day. But why?

Read more »

Person pointing at an increasing blue graph which represents a rising share price.
Share Gainers

Why Adriatic Metals, Catapult, Seek, and TechnologyOne shares are racing higher today

These shares are having a good time on hump day. But why?

Read more »