With a 6% dividend, is this company a passive income no-brainer?

When it comes to passive income investing, high dividend yields can certainly catch the eye of income-hungry investors. Man Group (LSE:EMG), a global investment management firm, is currently offering a juicy 6% dividend yield. But is this FTSE 250 company a no-brainer? Let’s dive into the details and see if this opportunity is as good as it looks on the surface.

A financial giant

First, let’s talk about what the firm does. As one of the world’s largest alternative investment managers, the company offers a range of quantitative and discretionary investment strategies. With a market cap of £2.5bn and over £108bn in assets under management, this is no small fry in the financial world.

Now, onto the numbers that matter. Interestingly, a discounted cash flow (DCF) calculation suggests the current price is about 64.5% below an estimate of fair value. Although such an estimate is far from guaranteed, it’s a pretty big indicator that there’s a lot of value here if management can make a success of the next few years. Moreover, annual earnings are forecast to grow by 15.62% for the next three years.

To me, looking at the competition is always critical when seeing a company or sector trading so far below what the numbers suggest is a fair valuation. The company’s price-to-earnings (P/E) ratio stands at a modest 9.9 times, which is relatively low compared to the average of competitors, which stands at 17.6 times.

The dividend

But what about that tempting 6% dividend yield? It’s certainly attractive in today’s uncertain economic environment. However, I always feel that it’s crucial to look beyond the headline number.

I’d say it’s more important to note the fairly unstable dividend track record in the past. This is something income-focused investors should generally keep in mind, as consistency is often prized when it comes to dividend payments. With the dividend forecast to rise as high as 7.5% by 2026, any change in strategy could disappoint the market.

Plenty of risk

The business operates in a notoriously volatile industry, where performance can swing wildly based on market conditions. The company’s revenue and profits have shown significant fluctuations in recent years, which could impact dividend stability. Moreover, the firm’s fortunes are closely tied to its ability to attract and retain investor capital — a challenging task in an increasingly competitive landscape.

The firm’s global footprint, while providing diversification, also exposes it to currency fluctuations and varied regulatory environments. Additionally, as with any investment firm, there’s always the risk of reputational damage from poor fund performance or potential scandals, which could lead to investors moving elsewhere.

Not for me

So, is this a passive income no-brainer? Well, like most things, it’s not that simple. As many sectors in the market have soared in the last year, the shares have fallen by 1.1%.

Clearly, the company comes with complexities that demand careful consideration. So this isn’t quite the ‘set it and forget it’ passive income stream that some investors might be seeking. I think there are better opportunities out there, so I won’t be investing at present.