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Why I think the Magellan (ASX:MFG) share price is looking cheap

The Magellan Financial Group Ltd (ASX: MFG) share price is looking cheaper these days after falling 19% in two months.

What’s going on with the Magellan share price?

Magellan shares seem to have been sent downwards because of the FY21 result.

There was a lot going on in the last financial year.

Magellan (Capital Partners) made three external investments during the year, including new investment bank Barrenjoey and Mexican fast food business Guzman y Gomez. It spent $156 million on a 40% economic interest (and 5% voting interest) in Barrenjoey and $103 million for a 12% stake in GYG.

The company’s adjusted net profit after tax fell 6% to $412.7 million in FY21. This includes the after-tax losses incurred by the investments of Magellan Capital Partners, which amounted to $41.8 million.

Adjusted net profit after tax and before associates grew 4% to $454.4 million. But statutory net profit fell 33% predominately because of the restructuring of its retail funds for global shares.

The positives

For me, there was positive growth in places that help the underlying profitability of the business. This is a key reason that makes me think the Magellan share price could be cheap.

FY21 averages funds under management (FUM) rose 9% to $103.7 billion and profit before tax and performance fees of the funds management business increased 10% to $526.6 million.

Ignoring performance fees, it’s this growth of FUM that drives the Magellan profit higher. Average FUM in FY21 was $103.7 billion. The FUM had risen to $118 billion at 31 August 2021. I think that sets up Magellan for an even stronger year of profitability growth in FY22.

It should also drive the dividend higher for Magellan. Again ignoring performance fees, Magellan looks to pay out between 90% to 95% of its funds management profit – this core profit-funded dividend is steadily rising.

At the latest Magellan share price, the fund manager is going to pay a partially franked dividend yield of 5.4% in FY22 on CommSec’s numbers. That’s a really attractive dividend yield in my opinion.

Final thoughts on the Magellan share price

Magellan certainly isn’t as cheap as it could be. Though it’s a lot cheaper than Australian Ethical Investment Limited (ASX: AEF). But with FUM continuing to rise and its external investments making a lot of progress, Magellan could be one to consider for a combination of potentially good income and possible capital growth.

CommSec numbers put Magellan shares at 17 times the estimated earnings for the 2022 financial year. I’d be happy to buy a few shares today.

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At the time of publishing, Jaz owns shares of Magellan.
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