Legal & General (LSE: LGEN) shares are near the top of lists for high dividend yield. And with the share price near 273p, City analysts are forecasting the forward-looking shareholder payment to yield just over 7% in 2022.
At first glance, that level of income is attractive to me. But I’m also wary that big yields sometimes flag a warning for investors. In some cases, dividends prove to be unsustainable at high levels. But when directors slash dividends, the share price of a company can become a casualty as well. So that’s a potential double whammy that could sink my investment in a high-yielding stock.
Beware of cyclical elements
Some of the worst dividend-slashing offenders can come from cyclical sectors. Famine or feast business economics don’t lend themselves well to a sustainable programme of dividend payments. So, I’m wary of high-yielding companies in sectors such as housebuilding, oil & gas production, retail, travel, airlines, and many others, including finance.
And Legal & General falls into the financial sector. The company earns its living via insurance, investment management, capital, and retirement services. But the company does have a good record of paying shareholder dividends. The payment has generally risen a little each year and didn’t stop during the pandemic either. And that’s despite a plunge in earnings in 2020.
However, apart from the 2020 blip, the trajectory of earnings, book value, operating profit, and dividends has been upwards since 2011. And analysts have pencilled in low, single-digit advances for earnings and the dividend in 2022.
Yet, despite all the progress with the financials, the share price is near to where it was in 2015 after moving essentially sideways. And I think that’s a further signal of the presence of cyclical operations.
When cyclical companies have been earning decent profits for several years, the stock market tends to keep their share prices pinned down by reducing the valuation. Yet, if earnings falter, the market can be brutal at marking stocks down. And we could be seeing such a set up now with Legal & General — limited upside for investors but plenty of potential risk on the downside.
An upbeat outlook statement
And such risks did bite around 2009 in the wake of the financial crisis of the noughties when the dividend was reduced. However, in August 2021, with the half-year results report, the company delivered an upbeat outlook statement. The directors said they were “confident” in LGEN’s strategy. And that is aimed at achieving resilient, organic growth, “supported by our strong competitive positioning in attractive and growing markets”.
There’s no doubt that LGEN has been trading well and growing for more than 10 years. And, on balance, I would add a few of the shares to my diversified portfolio now despite my reservations.
We’ll find out more about the progress of the business with the full-year results report due 9 March.
