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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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%.


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.

More on Investing Articles

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

£9,000 in savings? That could become passive income of £19,175 a year

It's possible to invest affordable sums of money into building a big passive income stream. Here's how I'd go about…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Legal & General shares: a once-in-a-decade passive income opportunity?

Is a dividend yield at its highest level in a decade, combined with a strong record of increasing payouts, a…

Read more »

Investing Articles

With a 7% yield and 4.1 P/E, is this the best passive income stock on the FTSE 350?

Millions of Britons invest for a passive income. While our writer isn't buying this stock yet, he believes it's worth…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

This amazing FTSE 250 has a 8.8% dividend yield and trades at just 4x forward earnings!

Our Foolish writer believes this FTSE 250 stock is worth keeping a very close eye on. However, he's not keen…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Could this brilliant airline stock be the most undervalued company on the FTSE 100?

Our writer believes this FTSE 100 stock may provide market-beating returns over the coming years, noting its undervalued metrics and…

Read more »