The Legal & General Group (LSE: LGEN) share price has had a bad time. Well, when I say bad, I mean good for investors who want to buy now.
It’s down 15% over five years. And that’s pushed the price-to-earnings (P/E) ratio down below seven. To give some sort of scale, that’s about half the FTSE 100‘s long-term average.
It’s about dividends
Shouldn’t one of the biggest insurance firms on the UK stock market be worth more than that? I think so.
It is a cyclical sector, mind, and insurance valuations can often look low. But I think a down cycle can make a great time to buy in. The real key for me, though, is the dividend.
Right now, forecasts put the Legal & General dividend yield for 2023 at 8.6%. And if they’re right, it should rise further in 2024.
But we can’t ignore the pressure on financial firms from our dire economic outlook.
FY 2022
We have a couple of months to wait to find out how the first half has gone for Legal & General. And that’s when the real inflation and interest rate pain kicked in.
But 2022 was still a tough year, and the insurer actually did pretty well.
Operating profit climbed 12% to £2.53bn. And that same 12% rise was reflected in the earnings per share figure. It all helped give the dividend a 5% boost.
When it comes to keeping a big dividend going, cash is key. And my eyes are on how the firm’s five-year plan is going.
Cash generation
The board reckons it’s on track to meet its goals, with cash generation up 14% to £1.9bn. And it spoke of “strong dividend headroom“. So far, so good.
But I fear liquidity might come under pressure this year. And for that, I look to a number of ratios. Over at the banks, their Common Equity Tier 1 ratios (which give an idea of how much ready cash can be raised) are strong.
Here at Legal & General, it’s all about the headline Solvency II coverage ratio. And it reached an impressive 236% at the end of 2022. That’s up from 187% a year prior.
And even better, by March this year it was nicely steady at 240%. So at least the first three months of 2023 look fine so far.
Dividend risk
I do think there’s a threat to the dividend this year. It would be covered about 1.6 times by forecast earnings. That looks fair, but I’d like to see a bigger safety margin at a time like this.
If the company has to hold back on its five-year dividend plan, that could hit the share price.
I still rate the stock as one of the best dividend buys in the FTSE 100, though. So why haven’t I bought any yet?
Well, I already hold some Aviva, and I think that shows a lot of the same good things as Legal & General. But the latter is on my list for my next buy. And it might be the best in the sector.
