From June 2022 to August 2023, my wife and I built a new portfolio of undervalued shares. In total, we bought seven US stocks, 15 FTSE 100 shares and five FTSE 250 holdings.
Of course, having bought 27 new shares, returns from these stocks have been varied to date. Even so, I’m surprised at the ongoing weakness in the shares of one of our core Footsie holdings.
A cheap FTSE 100 share
For me, one of the most undervalued shares in the Footsie today is insurer and asset manager Legal & General Group (LSE: LGEN). At every level, I regard this company as one I intend to own for many, many years.
Between 1987 and 2022, I worked in UK financial services for a string of different companies. That experience helped me to appreciate how well-run L&G is. Founded in 1836, this great business has a strong brand and is run by proven management with solid strategic goals. What more could I want?
However, judging by L&G’s share price, I’d think this business was just limping along. At 226.4p, the group is valued at £13.5bn. This is 27.2% below the 52-week high of 311.13p, hit on 8 March — just before the US banking crisis erupted.
Over one year, this stock is down 6.5% , while the shares have declined by 13.7% over five years. But these returns don’t tell the full story because Legal & General pays generous dividends to its patient shareholders.
L&G is a long-term winner
Following the Covid-19 crisis of 2020-21, L&G’s solvency ratio — one measure of its financial strength — climbed to 230% by mid-2023. This leaves it with £9.2bn of surplus capital that can be returned to shareholders over time via dividends and share buybacks.
What’s more, L&G has increased its earnings per share (EPS) every year since 2011, with the exception of Covid-hit 2020. In 2011, EPS hit 12.42p. And in 2022, this figure more than tripled (+208.6%) to 38.33p.
As EPS rose, L&G’s board kept bumping up its yearly dividend payout. In 2011, the total dividend was 6.4p. By 2022, this had soared to 19.37p, up 202.7%.
In addition, the group’s book value per share surged from 86p in 2011 to 194p in 2022. That’s yet another positive sign that this firm is going in the right direction. Even coronavirus (and the collapse of stock and bond prices in 2022) hasn’t beaten this business.
This stock looks too low
Despite its long-term record of success, L&G’s shares look too cheap to me. The current dividend yield of 8.7% a year is among the highest in the London market. It’s also more than twice the FTSE 100’s yearly cash yield of around 4%.
Note that L&G raised its latest interim dividend by 5% to 5.71p from 5.44p. Even better, its board committed in its latest half-year results to keep raising the dividend by 5% a year until 2024. Hence, as a value/dividend/income investor, I see it as a no-brainer buy.
However, in the interests of balance, I should point out that its success is closely tied to global financial markets. Another market meltdown on the scale of spring 2020 could send L&G’s earnings plunging again. Of course, I hope this doesn’t happen!
