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Should I Buy Legal & General Group Plc?

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I am out shopping for shares again. Should I add Legal & General (LSE: LGEN) to my basket?

Legal eagle

Last time I examined Legal & General Group, way back in November, it was on top form. It had post record sales over the year and management was confident of more to come in 2013. Has L&G delivered on that promise? And should I buy it?

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L&G certainly has delivered to investors. Its share price is up 50% over the past 12 months to £1.97, against less than 12% for the FTSE 100 as a whole. Over two years, it is up 108%, against 26% for the index. And it just keeps on growing, up 25% over six months and 10% over three months. 

Its latest half-year results, published earlier this month, showed a 13% rise in profit before tax to £592m and a 10% rise in operating profits to £571m. Net cash generation leapt 23% generation to £500m, earnings per share (EPS) rose 13% to 7.82p. No wonder investors were pleased.

L&G now manages total of £111bn, up from £70bn in 2012, thanks to acquisitions such as the fund management platform Cofunds, and healthy stock market growth. There were strong figures everywhere, across annuities, where individual sales rose 44% to £754m, and protection, where modest 3% UK growth to £689m was dwarfed by 10% US growth to $503m.

Asia adventures

L&G hasn’t got everything right. It doesn’t have the same exposure as Prudential (LSE: PRU) (NYSE: PUK.US) to fast-growing Asia and emerging market economies although, given the growing crisis over there, that may prove a blessing in disguise. And there are wider threats, such as the impact of US tapering off QE on stock and bond markets, which could hit investment returns and customer appetite for new products. But my biggest worry is where the group can go from here. Can it maintain this blistering pace?

L&G’s valuation is starting to look a little pricey, at 14.1 times earnings. That’s slightly more than the life insurance sector as a whole, which trades at 12.73 times earnings. Its dividend yield is markedly below the sector average, at 3.9% covered 1.8 times, against an average of 4.8%. These results, of course, are a tribute to its recent success.

Prudential, another insurance sector success story, trades at a similar 14.6 times earnings, yet yields a far lowlier 2.6%. L&G’s forecast EPS growth of 13% this calendar year and 7% next year suggests its momentum will slacken a little. Prudential’s EPS outlook is a little rosier, at 10% this year and 12% in 2014 (Asia notwithstanding).

Both are great companies in fine form. L&G has had a glorious run, but may struggle to maintain its recent blistering pace. One to buy on weakness, maybe, but definitely one to buy.

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> Harvey owns shares in Prudential. He doesn’t own shares in L&G.

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