The Legal & General (LSE:LGEN) share price dropped 8% in March amid the broader sell-off of FTSE 100 shares. I believe this reinforces its position as one of London’s best value stocks to buy.
Today, the blue-chip insurer trades on a forward price-to-earnings (P/E) ratio of 7.2 times. This is well below the average of 14.5 times for the FTSE index. It also makes the business cheaper than major rival Aviva.
Legal & General shares also offer brilliant value when it comes to dividends. Its 8.4% yield for 2023 smashes the 3.6% average for FTSE 100 stocks.
Big risks
I don’t think the insurer’s low valuation is a fair reflection of the company’s risk and reward profile. However, investors need to be aware of some significant hurdles the firm must navigate to generate decent profits.
A saturated marketplace is one reason why L&G shares — like those of so many of its rivals — trade so cheaply. There are many rivals like Aviva, Axa, Prudential, MetLife and RSA Insurance that the FTSE firm has to battle against.
Like any firm facing huge competition, L&G has to keep prices low to stop customers flocking to its competitors. Yet even these profit-squeezing actions aren’t always enough to prevent market share erosion.
A gloomy economic outlook is another reason why the company’s shares trade on a low P/E ratio. Unlike general insurance, demand for life insurance tends to fall when consumers feel the pinch.
City analysts think Legal & General’s profits will drop 12% in 2023 as the global economy cools. Things could remain tough beyond then too if weak economic growth persists.
Massive potential
Yet I still believe the potential rewards of owning the life insurer offset the dangers. I take a long-term view when it comes to buying shares. And I believe the outlook here remains robust.
First of all, the company has terrific earnings possibilities due to key demographic trends. For instance, the rapid growth of elderly populations is driving demand for its annuities, pensions and other financial products. This particularly important trend for L&G looks set to run for decades too.
The World Health Organisation thinks the number of people aged 60 and over will more than double between 2015 and 2050. Then it will reach 22% of the global population.
A top FTSE 100 stock
I’m also excited by Legal & General’s overseas expansion to boost profits and, more specifically, in North America.
Last autumn, the firm invested $500m to establish a real estate platform for the life science, research and technology industries. This is likely to be the first of many such international investments.
I’m also attracted by Legal & General’s robust balance sheet. It had Solvency II cover of 240% as of March, more than double the regulatory requirement. This should provide the bedrock for earnings-boosting investments and big dividends for years to come.
