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This Week’s Top Blue-Chip Income Buy: Legal & General Group Plc

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I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.

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Right now, I reckon insurer and asset manager Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) is looking a great buy for income.

L&G has recovered strongly since the financial crisis of 2008/9. The dividend took a knock, but overtook its pre-crisis level by 2011 — and has gone from strength to strength since.

The shares, which are trading at 235p at the time of writing, are just 3% below their recent all-time high. Nevertheless, a good dividend and a new dividend policy announced with the group’s final results this week, are a bit of a game‑changer for income investors.

A great opportunity right now

L&G reported net cash generation of over £1bn for 2013, more than three times that generated in 2008. The board is recommending a final dividend of 6.9p, giving a full-year payout of 9.3p, 22% higher than 2012. Anyone investing before the ex-dividend date of 23 April will be entitled to receive the final dividend.

At a share price of 235p, the trailing 12-month dividend yield is 4%, compared with 3.5% for the FTSE 100 as a whole. Furthermore, the yield is not only ahead of the market to begin with, but can also be expected to grow much faster than the market over the next couple of years, due to the policy L&G has just announced.

The 9.3p payout for 2013 was covered 1.82 times by net cash, but the board intends to reduce cover to nearer 1.5 times over the next two years. This would see the yield rise to 4.8% even if there were to be no growth in cash generation.

However, there’s every likelihood L&G will grow cash. The business has great momentum, and the company says, “we continue to see profitable growth opportunities, both organic and via selective acquisitions”.

L&G’s dividend policy is based on assumptions about new solvency regulations, about which full clarity won’t emerge for at least 18 months. But the company seems pretty confident in its capital surplus forecasts under the new regime.

The final dividend and the forecast next interim both offer anyone investing today a yield of over 4% for the 12 months ahead, with the turbo-charge of the new payout policy boosting the company’s already-strong dividend growth prospects over the next two years. Hence, I rate L&G a great buy for income investors right now.

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G A Chester does not own any shares mentioned in this article.

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