Income and value investors focused on large-caps have had a rough time of it lately with valuations across the FTSE 100 soaring post-Brexit and dividend yields falling. This, alongside the woes of miners and banks, has made for lean times for investors hungry for a quarterly cheque from their holdings.
Thankfully, Legal & General (LSE: LGEN) is here to help with its shares trading at just 10 times forward earnings, below their five year average, and a very handsome 5.7% dividend yield to keep income investors happy. And although this bargain basement valuation suggests low growth ahead, the company so far shows no signs of slowing the tremendous progress it’s made in growing earnings over recent years.
The key has been a diversified approach to benefitting from an ageing population in the developed world that is leading retirees and companies to engage Legal & General for pension solutions, insurance, investments and general savings. In H1 this year, double-digit profit growth from its two main divisions, retirement and investments, saw group operating profits leap 27% year-on-year (y/y) to £988m.
A large chunk of this growth was due to the release of £126m in reserves due to reductions in life expectancies for customers, but even excluding this possible one-off event, growth was very healthy. Looking ahead, there are still plenty of growth opportunities open to the company. Overseas operations are still small. But the US insurance business is profitable and growing quickly while international sales of its investment products are increasing by double-digits.
On top of this the company’s willingness to buy the bulk annuities business from rivals fleeing the sector could prove a solid use of capital for the long-term oriented insurer. With profits growing quickly, very healthy capital reserves, a bumper dividend and attractive valuation, I reckon income and value investors alike should take a look at Legal & General.
As safe as you can get
But if insurers aren’t your cup of tea, another high-yielding option trading at an attractive price is infrastructure investment fund International Public Partnerships (LSE: INPP). As its name suggests, the company invests in the debt of large infrastructure projects with a focus on schools, energy transmission networks and transport links.
These projects generally have some degree of government backing and provide reliable cash streams over many, many years that INPP either re-invests or returns to shareholders via a dividend that currently yields 4%. At today’s share price the fund trades at a 14% premium to its net asset value, but in a world of rock bottom interest rates this isn’t entirely unreasonable given the rather desultory options out there for investors seeking safe income options.
The company’s latest large investment was £274m to purchase a 61% stake in National Grid’s UK gas transmission network alongside other investors, which helped push up the average life span of its investments to 36 years. This means management can use long-lived, highly predictable revenue to target an average 2.5% increase in dividend payments every year. INPP’s shares won’t rocket overnight, but since 2006 the fund has produced a compound annual total shareholder return of 9.5%, which isn’t too shabby at all given its low-risk nature.
