M&G (LSE: MNG) has been a foundation stock in my passive income portfolio for some time now.

These shares generate very high dividends for me without too much effort on my part – hence the ‘passive’ label. In fact, all I need do is pick the right shares initially and then monitor their progress periodically after that.

A key quality I want in my passive income picks

It is a company’s earnings growth that determines its dividend and share price over time.

A risk to M&G’s is another surge in the cost-of-living crisis that may cause customers to cancel their investment policies.

That said, consensus analysts’ estimates are that the firm’s earnings will increase a stunning 44% every year to end-2027.

What might this mean for the dividend yield?

Its 2024 results released on 19 March saw it move to a progressive dividend policy. This is where a dividend is expected to rise at least in line with increases in earnings per share. However, if this falls, the dividend will not be reduced.

In M&G’s case, this policy began with a 2% rise in dividend to 20.1p. This gives a yield of 9.2% on the current share price of £2.18.

On this average yield and with ‘dividend compounding’ used, investors considering a £10,000 stake in M&G would make £15,005 in dividends after 10 years. After 30 years on the same basis, this would rise to £146,344.

At that point, the holding would be worth £156,344, generating £14,384 a year in passive income! But that is not guaranteed, of course.

However, analysts project the dividend will rise to 20.6p in 2025, 21.3p in 2026, and 22.2p in 2027. These would generate respective yields of 9.5%, 9.8%, and 10.2%. By comparison, the average FTSE 100 yield is 3.5%.

What are the potential share price implications?

One part of my standard stock price assessment is to compare its key valuations with its competitors.

M&G’s 0.9 price-to-sales ratio looks extremely cheap compared to its peers’ average of 4.3. This group comprises Legal & General at 1.2, Man Group at 2.2, Hargreaves Lansdown at 6.9, and Intermediate Capital Group at 7. The firm’s 1.6 price-to-book ratio also looks a bargain against the 3.7 average of its competitors.

The second part of my assessment establishes where a stock’s price should be, based on future cash flow forecasts. The resulting discounted cash flow analysis for M&G shows it is 54% undervalued at its present £2.18 price.

Therefore, the fair value for the stock is £4.74, although it could go lower or higher due to market forces.

How does the business look right now?

I think M&G’s 2024 results released on 19 March saw significant progress made on all three of its key strategic objectives.

Beginning with financial strength, its adjusted operating profit before tax jumped 5% year on year to £837m. This reflected a 19% increase from its Asset Management division and stable results from the Life and Corporate Centre segments.

In terms of simplifying the business, the firm reduced its managed costs by 2% due to £188m cost savings.

And towards delivering growth, it saw assets under management and administration rose £2bn to £346bn.

In sum, given its extremely high earnings growth forecasts and the implications for price and yield, I will buy more M&G shares very soon.