Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US).
Valuation
To begin with, how does the company’s valuation compare to its closest peers and the wider life insurance sector?
Currently, Legal & General trades at a historic P/E of 14.5, which is below the life insurance sector average of 21.
Furthermore, Legal & General’s closet profitable peer, Old Mutual (LSE: OML) trades at a historic P/E of 15.4, making Legal & General look cheaper still.
Legal & General’s other closet peer by market capitalisation is Aviva (LSE: AV) (NYSE: AV.US). However, as Aviva made a loss during 2012, it has not been possible for me to calculate many of the figures required for Aviva within this article.
Balance sheet
| Assets under management | Return on equity | |
|---|---|---|
| Legal & General | $563 billion | 29% |
| Aviva | $513 billion | N/A% |
| Old Mutual | $464 billion | 8% |
Surprisingly, despite its lower than average valuation, Legal & General has the highest value of assets under management in the group and achieves the best return on shareholder equity.
With more than half-a-trillion dollars in asset under management, I believe that Legal & General deserves a premium over its peers and not a discount, which it currently has.
Company’s performance
| Earnings growth past five years | Net profit margin | |
|---|---|---|
| Legal & General | -6% | 14% |
| Aviva | N/A% | N/A |
| Old Mutual | 17% | 15% |
Unfortunately, over the last four years Legal & General’s earnings have slipped slightly. However, despite shrinking earnings, Legal & General has improved its cash generation over this period.
Indeed, the firms cash generated from operating activities has grown 360% during the five-year period as earnings have fallen. As cash is king in business, cash generated from operating activities can be a more revealing operating metric than earnings growth.
In comparison, Old Mutual, which increased earnings 17% over the five-year period only noted an 88% rise in cash generated from operations.
Dividends
| Current Dividend Yield | Current dividend cover | Projected annual dividend growth for next two years. | |
|---|---|---|---|
| Legal & General | 3.8% | 1.8 | 34% |
| Aviva | 4.4% | N/A | -13% |
| Old Mutual | 3.6% | 2.5 | 31% |
| Sector average | 3.5% | 1.4 |
Legal & General has paid a dividend since 1998 but was forced to slash its payout twice, during 2008 and again in 2009 as the financial crisis took hold.
However, after these two cuts the payout quickly returned to new highs . Indeed, since the first cut during 2008 Legal & General’s dividend payout has expanded a compounded 28%, or 7% a year.
What’s more, with payout growth of 34% expected over the next two years and a 3.8% yield covered nearly twice by earnings, Legal & General’s dividend looks extremely attractive.
Foolish summary
All in all, it would appear that Legal & General is a highly cash-generative business, with a solid dividend payout and is currently trading at a discount to its sector peers.
So overall, I feel that Legal & General is a much stronger share than its peers.
