UK financial services giant Legal & General (LSE: LGEN) has long been a star dividend stock in the FTSE 100.
In 2018, before the onset of Covid, it paid out 16.42p per share. This was a yield of 7.1% — one of the highest in the benchmark index at the time.
In 2019 it paid 17.57p (a yield of 5.8%), the same again in 2020 (6.6%), and 18.45p in 2021 (6.2%).
In 2022, the payout was 19.37p, which on the current share price of £2.36 gives a yield of 8.2%. This compares to the current average yield of about 3.7% for the FTSE 100.
Analyst projections are for a 20.33p dividend this year, 21.35p next year, and 22.51p the year after that.
And the shares are 12% lower than they were just five months ago – for no good reason, in my opinion.
More sinned against than sinning
The price drop began on 7 March, when fears of a possible new financial crisis were developing.
The spark came with the failure of the little-known Silicon Valley Bank and grew with the failure of Credit Suisse.
As a company offering life insurance, pensions, retirement, and investment services, Legal & General felt the fallout. But I do not think this was warranted by its fundamentals.
From the start of its five-year plan in 2020 to the end of 2022, it achieved £5.1bn of cash generation. It also made £4.9bn in cumulative capital generation.
It stated in its 2022 results that even zero growth in both metrics from now to 2024 would allow it to generate £8bn-£9bn in cumulative cash and capital.
Another sign of its balance sheet strength was its Solvency II ratio rising to 236% in 2022. This ratio measures how well shareholders are protected against a company becoming insolvent.
Coverage of over 100% for an investment and insurance company meets all the regulatory requirements. Coverage of 236% is regarded as extremely strong.
Growth in key business lines
The company’s core business also looks very strong to me.
Its retirement solutions business remains a market leader in the UK Pension Risk Transfer (PRT) space. This is where a company takes over other companies’ pension scheme commitments for a guaranteed return from them.
On 10 July, it added more business — a £1.8bn PRT deal with FTSE 100 water group United Utilities.
It is also in the Top 10 in the US PRT market, which has exceptional growth potential. Only around 9% of the US’s $3trn of defined benefit pension schemes have been transferred so far.
Legal & General Investment Management is also a leading global asset manager. It is ranked 11th in the world, with £1.2trn of assets under management.
The chief risk for me in the stock is that inflation and interest rates remain high. This would continue to act as a deterrent to new client business.
However, I have holdings in the company and am very happy to keep them. If I did not, I would buy it now for the dividends and share price gains. Specifically, at minimum, I hope to see all the losses from March recouped this year.
