I’ve just added another FTSE 100 income stock to my self-invested personal pension (SIPP), and I’ve got huge hopes for this one. It combines high income with a thrillingly low valuation. Better still, it’s a solid company that should rebound once stock markets recover.
Opportunities like this only come along once in a decade or so. I already hold the stock and now I’m wondering whether to buy more.
On the hunt for dividends
The company in question is FTSE 100 insurer and asset manager Legal & General Group (LSE: LGEN). I’ve been itching to buy it for ages, but didn’t have the cash. After transferring three legacy pensions into a SIPP, suddenly I did.
I started cautiously, investing a modest £1,000 on 28 April then another £1,000 on 6 July. Last week, I got a taste of the rewards to come, when the L&G share price grew 3.47% as the FTSE 100 rallied.
That was only marginally ahead of the FTSE 100 as a whole, which climbed 3.08%. However, L&G’s dividend income is its number one attraction, and the margin here is a lot wider. The stock is forecast to yield 8.78% this year, against 3.68% across the index. That’s enough to double my money in just over eight years even if the share price doesn’t rise at all.
In fact, I should get there sooner, as the yield is expected to rise in 2024 to a thumping 9.22%. Dividends are never guaranteed, but I would hope for a steadily rising income from L&G. Its most recent dividend hike was 5%.
When I look at those figures I get the familiar itch, and now I’m looking to up my stake in L&G to £5,000. This is my self-imposed maximum in any individual stock, to spread risk.
I don’t think it’s a value trap
Now looks a brilliant time to buy because the stock is so cheap, trading at just six times earnings. Cheap doesn’t guarantee good value, of course. L&G’s shares have struggled for some time, trading 12.23% lower than five years ago. Over one year, they’ve fallen 9.18%. We’ve faced a world of trouble in that time, from the pandemic to war in Ukraine and now inflation. As an asset manager, L&G has been exposed to the full force of these trends.
It’s still making money, though. Last year’s operating profit climbed 12% to £2.52bn, despite profits at its investment arm LGIM crashing almost 20% from £422m to £340m as global share prices tumbled. So far, 2023 is looking much brighter for markets.
Once inflation is really on the run, I expect shares to rally further with L&G playing its part. Either way, the income should keep flowing.
Nothing is guaranteed when investing. Inflation and interest rates could prove sticky, delaying the recovery. L&G has net debt of £5.56bn, and servicing costs will be higher than they were. Instead of rising, the market could crash.
Yet with a high (and rising) solvency II coverage ratio of a record 236% in 2022 (up from 187% the year before), L&G looks solid. So does its commitment to shareholder returns. I think I need to buy more of it, before the next leg of the recovery.
