Value alert: Legal & General shares trade at just 6.3x earnings!

Dr James Fox explains why he’s buying Legal & General shares, looking at their absurdly low valuation and very attractive dividend yield.

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Legal & General (LSE:LGEN) shares also suffered as financial stocks experienced a sell-off in recent weeks. However, now the general consensus is that this sell-off — prompted by the collapse of Silicon Valley Bank — wasn’t warranted. As such, there’s plenty of value to be had in financial stocks, and Legal & General is among my top picks.

Let’s explore why.

The sell-off

Financial stocks have tanked in recent weeks after the SVB fiasco and the implosion of Credit Suisse and its eventual takeover by UBS.

These concerns largely centred around unrealised bond losses, as SVB was forced to sell its bonds at a loss (that is, realise its bond losses) in order to sure up its finances. This is because bond prices and bond yields are inversely related. As interest rates have gone up, lower yielding bonds have seen their values fall.

However, SVB is unique. It’s very focused on the tech-sector and its depositors wanted their money back at a time when SVB’s bond holdings were falling in value.

Other financial institutions aren’t so focused on one sector, and that means they’re less vulnerable to sector-specific shocks. Moreover, most big financial institutions don’t need to sell their bonds — the majority are held until maturity.

As such, I think the sell-off has been entirely unwarranted. But it has created opportunities. For one, Legal & General shares are down 10% over a month.

Performance and valuation

Legal & General is a fairly consistent business. In the year to the end of December 2022, operating profit rose 12% to £2.52bn, beating consensus expectations of £2.46bn.

Earnings per share also pushed up 12% to 38.33p. Broadly, the results were very positive with the exception of falling profits in its investment arm.

Going forward, it’s also been noted that Legal & General is arguably the most exposed to the positive trends in bulk purchase annuity. That’s a big positive.

Meanwhile, the company’s solvency II coverage ratio rose to 236% from 187% during 2022. And the full-year dividend was lifted 5% to 19.37p a share.

But valuation is where I want to focus. Legal & General now trades a just 6.3 times earnings. It’s worth bearing in mind that the FTSE 100 average price-to-earnings is around double that.

I appreciate this high dividend, relatively low growth business traditionally trades at a discount to the index, but this is seriously cheap, especially when we’ve established there isn’t an existential threat to the company.

The dividend yield currently sits at a very tempting 8.4%.

Undervalued

I believe Legal & General is undervalued, and I’m buying more. But I’m not the only one. The average target price on the financial services giant is 318.38p. This infers a near 50% upside on the current price point.

Interestingly, Berenberg actually lowed its price target to 290p from 345p in February before financial stocks imploded. But, now, even that target price demonstrates considerable upside.

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.

James Fox has position in Legal & General Group Plc. 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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