The Legal & General (LSE:LGEN) share price struck a high of 311.1p a share for 2023 back in March. Since then it’s fallen sharply and so, based on current dividend forecasts, its yield has shot through the roof.
At 232p a share, the financial services giant carries a mighty 8.8% yield for this year. This is more than double of the 3.8% average for FTSE 100 shares.
And things get even better for 2024 and 2025. For these years the dividend yield jumps to 9.2% and 9.7% respectively.
But just how robust are current dividend forecasts? And should I buy Legal & General shares for my portfolio today?
Dividend growth
The company has been steadily growing dividends again since freezing them during the height of Covid-19 in 2020. And City analysts expect them to keep growing, even though earnings are tipped to fall this year.
Last year’s 19.37p per share reward is tipped to rise to 20.33p in 2023. Further increases to 21.35p and 22.51p are predicted for 2024 and 2025 respectively, supported by an expected return to profits growth.
Yet at first glance these dividend estimates look more fragile than I’d like. For the next three years predicted payouts are covered between 1.7 times and 1.9 times by anticipated earnings. Any reading below 2 times can often be considered a red flag for investors.
Lower-than-ideal coverage is especially concerning for companies like Legal & General where revenues are highly sensitive to broader economic conditions.
Cash machine
That said, I still believe the business has a great chance of hitting these dividend targets. It’s why I bought L&G shares for passive income just two months ago.
This is because of the FTSE 100 firm’s cash-rich balance sheet strength. Even if earnings fall short it should still have the financial resources to pay gigantic, market-beating dividends.
The company’s Solvency II capital ratio stood at a colossal 240% as of March, helped by a steady rise in interest rates. The firm generates huge amounts of cash and this gives it massive scope with which to raise dividends. In 2022, its net surplus generation over dividends came in at £700m.
A FTSE 100 bargain
It’s my belief that Legal & General is one of the best UK value shares out there. On top of those huge dividend yields it trades on a forward price-to-earnings (P/E) ratio of 7.1 times.
Long-serving CEO Nigel Wilson will be replaced by Santander’s head of Europe António Simões next year. And this creates some uncertainty looking ahead. But I still believe the firm is in great shape to grow earnings and profits strongly over the near-term and beyond.
Populations in the West are rapidly ageing, and this gives the business huge headroom to increase sales. And L&G is expanding its operations in hot growth markets like North America to fully capitalise on the opportunity too.
Encouragingly, the company is also one of Europe’s biggest asset managers and overseas business here is growing strongly. Legal & General is a share I plan to hold for the long haul.
