The Legal & General (LSE:LGEN) share price has dropped 15% in 2022. Based on its current dividend forecast for this year, the insurance business stock yields an impressive 7.7%.
This reading is twice the size of the 3.7% FTSE 100 forward average. And things get even better for 2023. Next year, Legal & General’s yield sits at a jaw-dropping 8.1%.
But how robust do current dividend forecasts look? And should investors buy the beaten-down dividend stock for their portfolios?
Dividend growth
Legal & General’s robust balance sheet gives it the confidence and the firepower to pay big dividends year after year. Even as earnings fell at the height of the Covid-19 crisis, the firm kept the full-year dividend locked at 17.57p per share.
The business paid a total 18.45p per share reward in 2021. And City analysts are expecting further growth over the short-to-medium term. Payouts of 19.5p and 20.9p per share are tipped for 2022 and 2023 respectively.
The bad news is that these dividend projections aren’t covered exceptionally well by expected earnings. Dividend coverage sits at around 1.8 for the next two years.
A reading of two times and above provides investors with a wide margin of error in case profits miss.
Cash machine
But lower-than-desired dividend coverage is normal practice over at Legal & General. Yet the business still has that excellent record of dividend distribution.
This is testament to the company’s exceptional cash generation, which continues to support bright dividend forecasts.
In its latest trading statement, Legal & General said its Solvency II capital ratio ranged between 225% and 230% as of 11 November. This was up significantly from 187% a year earlier.
And the business said that government plans to reduce the risk margin of long-term insurers by 65% would improve its Solvency II ratio by a further 3% to 4%.
An industry heavyweight
Legal & General’s dividend forecasts for the next two years look quite impressive, then. But should long-term investors buy the FTSE 100 stock for passive income?
On the one hand, the business operates in a highly competitive marketplace. Earnings (and therefore dividends) are under constant threat from other industry heavyweights like Aviva, Schroders, and AIG. So big shareholder payouts cannot be guaranteed going forwards.
Still, as a potential investor, I’m impressed by the company’s ability to keep on competing. It’s been offering financial services for a whopping 186 years and in the first half of 2022 grew operating profit 8% year on year to a colossal £1.16bn.
The verdict
It’s my opinion that Legal & General will remain a generous dividend payer for years to come.
It has fantastic brand recognition. And it operates in markets that look set to grow strongly in the coming decades. Demand for its pensions, for example, should rise as populations rapidly age and worries over the State Pension increase. On top of this, the firm is investing heavily in technology to supercharge its sales in our increasingly digitalised world.
I think Legal & General shares are a great buy for investors seeking long-term dividend income.
