The Legal & General (LSE: LGEN) share price fell 4.5% on 21 April. But it was just ex-dividend day, so it was to be expected. Except, the shares continued on down over the following days. We’re now looking at a 10% fall, and that’s making me think about buying.
The Legal & General share price is down a similar 10% over the past 12 months, as the insurance sector has been rather erratic. But over five years it’s pretty much kept pace with the FTSE 100, comparing favourably with something like Aviva, which has fallen nearly 20% over the same timescale.
Investors often shun financial stocks during economic downturns. So share prices of insurance companies and banks might be in for a tough time in the months ahead.
And insurance can be a bit of a cyclical business anyway. But whatever else I’ve had in my portfolio over the years, I’ve almost always found room for an insurance stock.
Inflation and recession?
Any company in the investment space might be expected to perform poorly when we face the prospects of soaring inflation and possible recession. So I wouldn’t be surprised to see the current Legal & General share price weakness continue for the rest of the year and possibly beyond.
But I think pessimism over Legal & General is likely to be misplaced. One thing that makes me think that is the company’s activity in the field of bulk annuities, where it is one of the leaders.
These are insurance products popular with pension schemes. They’re intended to be low risk. And I reckon that should help provide a safety buffer for Legal & General’s business in the short to medium term.
LGEN share price valuation
Buying insurance shares comes down, ultimately, to valuation. If I can buy them when they’re cheap, I can hopefully lock in years of passive income from dividends. And at today’s Legal & General share price, I’m convinced I’m looking at attractive value.
Based on 2021 earnings, Legal & General is on a price-to-earnings multiple of only around seven. And the 2021 dividend, if repeated in 2022, would yield 7.5%. What are the chances of the dividend being maintained?
Even during the pandemic, there was no dividend cut. In 2020, when earnings dropped by nearly 30%, the dividend was held. It was covered only 1.3 times by earnings, which is not great. But it was enough to get through a tough year.
Five-year plan
With 2021 results in March, the company reiterated the three key points of its five-year plan announced back in November 2020.
Those are for cash and capital to significantly exceed dividends, for earnings per share to grow faster than dividends (with dividends rising by low- to mid-single digits). And for net surplus capital generation to also exceed dividends. At the time, Legal & General reckoned it was on track to achieve those goals.
Nobody knew the full fallout from the war in Ukraine at the time. And prices are rising faster than anybody expected. So I suspect those ambitions might be a bit blunted this year. And if I buy now, there’s a good chance I could suffer a 12-month drop.
But the Legal & General share price still makes me want to buy for long-term dividend potential.
