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.
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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.
