Lots of investors like the dividend income offered by Legal & General (LSE: LGEN) and, indeed, I have benefitted from it myself in the past. But when it comes to capital gain, the Legal & General share price seems to be less attractive. It has moved less than 1% in the past year. In fact, it has moved little over a five-year period, losing 3%.
So while the 6.8% dividend yield and an attractive business model tempt me to add Legal & General back into my portfolio, does it make sense from a growth perspective?
Growth or income
A lot of shares are loosely divided into growth or income categories. A typical growth share is one like Tesla. Its end markets are growing quickly and the company is investing heavily to increase sales. There is unlikely to be a dividend any time soon, but the Tesla share price has increased by over a quarter in the past year alone.
A typical income share is tobacco manufacturer Imperial Brands. Cigarette demand is falling in most markets and the company eked out sales growth of less than 1% last year. However, it generates massive free cash flows and has limited investment needs as its business is mature. That helps support a hefty 7.6% dividend yield.
At first glance, Legal & General looks very much like an income share. It has a high dividend yield and is in the mature industry of financial services. But I do not think that gives full credit to the company’s potential for growth.
Revenues have moved around a lot, almost doubling between 2017 and 2019, for example, but falling nearly 20% last year. Meanwhile, profit last year surged 59% to top £2bn. That means the company now has a price-to-earnings ratio of less than 8. That looks cheap to me for a company with a large customer base and strong reputation.
Lacklustre Legal & General share price
So if the company has the potential for dynamic profit growth, as it proved last year, why has the share price essentially moved sideways?
In fact, the issue here is not just with Legal & General. Fellow insurers have also performed weakly, with Aviva losing 23% in a year, Direct Line down 31% and Admiral shares dropping 44%. Compared to that, I feel that simply staying roughly the same means the Legal & General share price has performed well for its sector.
Negative sentiment towards insurance shares reflects a number of risks, such as the potential impact of a recession on renewal rates and higher car replacement costs eating into profits.
My move
Those risks remain, in my view, and things could stay bleak for insurers for a while yet. That may push the Legal & General share price down.
But I think a lot of weak expectations are already priced in while, in fact, the company’s performance last year was strong. It benefits from a powerful brand and is highly cash generative. In the long term, I think that could be good for growth prospects. Meanwhile, the income looks attractive to me.
As a long-term investor, I would be happy to buy Legal & General shares for my portfolio today.
