An inflation-busting FTSE 100 income stock with growth potential too

As inflation erodes cash savings, Andrew Mackie explores the best FTSE 100 income stock for his portfolio.

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As inflation continues its upward trend, I am looking for a home for my hard-earned cash. Like so many others, I still have a large part of my savings stashed away in a cash ISA earning a pittance of an interest. Although I expect interest rates to rise in the coming years, it will be too late to protect a large part of my savings from the ravages of inflation.

Hardly surprising, therefore, that I am always on the lookout for high-quality FTSE 100 income champions with proven business models and a stated aim of paying out a large chunk of their profits in the form of dividends. At present, I have identified one such company that I believe stands head and shoulders above many of its peers.

Passive income champion

The company in question is Legal & General (LSE: LGEN). Although it offers a very generous 7.2% dividend yield, I never simply take the headline figure as the primary basis for my investment decision. If that was the case, I would look elsewhere, as there are several FTSE 100 firms that offer higher rates.

Far more important to me, is whether the company has a growth mindset that will allow it to maintain and potentially increase dividend payouts in the future. L&G certainly ticks the box here.

Over the period 2020-2024 it has a stated ambition for cash, capital generation, and earnings per share (EPS) to grow faster than dividend payouts. In its 2021 results, it achieved 12% growth in both cash and capital generation. It also has a very good track record of growing its dividend. Since 2011, both EPS and dividend per share have grown at a compount annual growth rate (CAGR) of 11%.

The business also expects dividends to increase between 3% and 6% per annum to 2024. Confidence in meeting these targets is backed up by the Legal & General’s strong balance sheet, which shows a capital surplus of £8.2bn to meet its regulatory obligations in the event of an economic downturn.

Diversified business model

Most people think of L&G as a life insurance and pension provider. However, it is a lot more than that.

It has £1.4trn of assets under management with expertise across both defined benefit and defined contribution pensions. Its largest business division, generating 43% of its operating profits, is its management of institutional pension risk transfer. With an ageing population and people becoming increasingly interested in active management of their pension nest eggs, I expect continued growth in the years ahead.

The more cyclical and exciting proposition is L&G Capital. Here, earnings increased 68% in 2021. Investing across commercial real estate, clean energy, and housing, it provides huge untapped potential for the business.

Consider the government’s levelling up agenda in the north of England. Delivering on this strategy will require new assets across physical and digital infrastructure together with urban regeneration. This will require huge inward investment to create these thriving, so-called smart cities. L&G Capital is well placed to benefit from this interconnected urban model.

Of course, there are risks. Primarily, investment markets are affected by the broader economic outlook. Rising inflation together with interest rate movements can have a large effect on the value of investments the company holds. Despite this risk, with the sell-off over the last two weeks, I think the shares offer an attractive income, and I intend to buy more.

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.

Andrew Mackie owns Legal & General Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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