Although the financials industry group has seen valuations of its constituents rise at a very fast pace in recent years, I believe there are still bargains to be had, with Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) being one of them.
Indeed, with the FTSE 100 trading on a price to earnings (P/E) ratio of 13.8 and the financials industry group having a P/E of 17.9, Legal & General stands out as an undervalued stock at current price levels.
It has a P/E of just 13.3, which is a discount of 3.6% to the FTSE 100 and a discount of just over 25% to its industry group.
Looking back at the last few years, Legal & General seems to have had a smoother ride than many of its industry group peers, with future growth prospects also appearing to be bright.
Therefore, such a wide discount seems unjustified. If shares were to trade on a smaller discount to the industry group, say a 10% discount, it would mean shares trading at around 250p, which is 21% higher than their current price.
Such a price would not be unreasonable, since it would still represent a sizeable discount versus the financials industry group and, as such, appears to be an achievable level over the medium to long term.
In addition, Legal & General continues to offer an above average yield of 4.4%. This is considerably higher than the FTSE 100 yield of 3.6% and even more generous than the financials industry group yield of 3.2%.
However, company management does not appear to be sacrificing the long term health and viability of the business in favour of providing shareholders with a short term income boost. Indeed, the payout ratio is only moderate at 59% and, therefore, seems to have scope to be increased.
Industry group peer Lloyds recently announced that it intends to pay out up to 70% of earnings as dividends by 2016. Such a payout ratio could put Legal & General on a yield of 5.3% at its current price level.
So, Legal & General offers the potential for significant capital gains over the medium to long term, as well as a generous yield which has the potential to increase should management become more generous with the payout ratio (which they have the scope to do).
