Why Legal & General Group Plc Should Be A Candidate For Your 2014 ISA

Legal & General Group Plc (LON: LGEN) is one of the best insurers out there.

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_ISA2The insurance sector has had a few tough years of recession, but when it comes to investing in an ISA for the long term, such cyclical trifles tend to turn out as mere ripples in a long upward trend.

A 50% rise!

But with its share price up more then 50% over the past 12 months already, to 238p, is Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) a good choice for some of the new £11,760 allowance coming in April? Or, indeed, for anything unused from this year?

Let’s take a look at the firm’s track record first:

Dec EPS Change P/E Dividend Change Yield Cover
2008 -17.88p n/a n/a 4.06p 5.3%  n/a
2009 14.82p n/a 5.4 3.84p -4.0% 4.8%  3.9x
2010 14.07p -5% 6.9 4.75p +24% 4.9%  3.0x
2011 12.42p -12% 8.3 6.40p +35% 6.2% 1.9x
2012 13.90p +12% 10.5 7.65p +20% 5.3% 1.8x
2013* 15.79p +14% 15.2 9.24p +21% 3.9% 1.7x
2014* 17.11p +8% 14.0 10.57p +14% 4.4% 1.6x
2015* 18.55p +8% 13.0 11.77p +11% 4.9% 1.6x

* forecast

So a rocky few years, but even though the share price has been rising since Legal & General’s earnings recovery started in 2012, it’s still on a reasonable price to earnings ratio (P/E) of 14-15 — the FTSE forward average stands at about 17 right now.

2013 results soon

Full-year results for 2013 should be with us on 5 March, and things sounded pretty positive at the half-way stage — with double-digit rises in operational cash generation and pre-tax profit. And there was a 22% rise in the interim dividend, setting the scene nicely for the expected full-year rise.

Dividends are the key for a successful long-term investment in the insurance sector, and Legal & General’s have been way outstripping inflation over the past few years. But we do need to sound a note of caution here, too — dividend rises that are ahead of earnings growth will stretch the cover, and we really don’t want to see Legal & General having to slash its dividend the way some others did when they overstretched things.

Leveling off

I can’t see dividend cover coming down much below that 1.6 times, so dividend growth is pretty certain to slow over the next few years — but if it just keeps pace with earnings, it will keep on filling up those ISAs very nicely.

I also don’t see the share price repeating its recent rapid rise in the near future. But if we should get 5% per year over the next 20 years and, say, an average dividend yield of 4.5%, we’d see a £1,000 ISA investment in Legal & General turning into more than £6,000 — and that’s more than four times what you’d get in a cash ISA at today’s interest rates.

So yes, I think you’d do well to consider Legal & General for a slice of that ISA cash — though I bet you wish you stashed some in 2009’s ISA when the P/E was down around five!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alan does not own any shares in Legal & General.

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