We’ve certainly been through a torrid few years for the insurance business, with a couple of companies forced to slash their dividends as they became too overstretched.
But despite suffering falling earnings in the early years of the financial crisis, Legal & General (LSE: LGEN) (NASDAQOTH:LGGNY) kept its dividends growing — and we have more of the same forecast for the next two years.
Quick recovery
Legal & General had recovered from its minor slump by 2012, a year which saw an 11% rise in earnings per share (EPS) accompanied by a 20% hike in its annual dividend. And it went on to better things in 2013, with a further EPS gain of 10% and another 22% added onto the dividend.
The share price has responded well too, having soared by almost 80% over the past three years to 207p, while the FTSE 100 has managed only around 10%. But even after that, the shares are still on a forward P/E based on 2014 forecasts of only a little over 12.
More to come
So what of those forecasts? Well, there’s currently a consensus for a 9% rise in EPS for the year to December 2014, with a further 8% penciled in for 2015. Then we have that 14% dividend hike predicted this year, to 10.6p per share, with another 13% suggested for next year.
While the share price has risen in line with these boosts, Legal & General still looks set to provide a dividend yield of 5% for this year, climbing to 5.7% next. But is the dividend safe? The 2013 payment was covered 1.63 times by earnings, and we’re looking at a likely cover of 1.56 times and 1.49 times respectively for the following two years.
I’m a little concerned to see cover dropping below 1.5 times, but if it can be kept to that level over the longer term (which will require a slowing down of those annual dividend rises), then I doubt there’ll really be anything to worry about.
Sentiment split
Individual forecasters are pretty much split on Legal & General, with seven out of 18 urging is to buy the shares and four wanting us to sell — the largest contingent, of seven, is sticking with a Hold rating.
But I’m firmly in the Buy camp — those well-covered dividends look tasty to me.
