It’s hard to pick my absolute favourite FTSE 100 stock but one portfolio holding looks pretty unbeatable today. It combines a dirt-cheap valuation with an ultra-high yield, and few of the risks I’d expect with that intoxicating combination.
The stock in question is insurer and fund manager Legal & General Group, (LSE: LGEN). I like it so much I made two purchases over the summer and I’m itching to buy more.
A favoured portfolio holding
This blue-chip has been a household name for as long as I can remember, yet lately it seems to have fallen off investors’ radar screens. It’s the same story with fellow FTSE 100 insurers and asset managers Aviva, Phoenix Group Holdings and M&G. All are cheap and offer massive yields.
The troubles of the last few years have weighed heavily on their share prices, as the pandemic, war and cost-of-living crisis brought everybody down. The sector should usually do better when the stock market is rising as this will drive up assets under management and boost customer inflows as investors return.
The Legal & General share price has fallen 16.45% over the last five years. Measured over 12 months, it’s up 4.71% but lately it’s been drifting downwards again.
At the Fool, we like buying shares backed by a strong underlying business that have been hit by broad market volatility. I think L&G fits that description nicely.
On 15 August, it reported an operating profit of £941m, which was a slight dip on the previous year’s £958m, but respectable given current worries. It boasts a super strong Solvency II coverage ratio of 230%, up from 212% in 2022.
Despite that, it’s trading at a valuation I might expect from a company in deep trouble, just 5.8 times earnings. That’s less than half today’s FTSE 100 average valuation of 12 times.
I don’t expect the L&G share price to spring back into life and rapidly close that valuation gap, given ongoing volatility. What it does do, though, is give me protection against a further dip in sentiment. I don’t feel that I’ve overpaid for the stock.
The dividends are coming
If the share price takes time to recover, that’s fine by me. It means my reinvested dividends will pick up more stock at the lower price. I received my first interim payment on 26 September. As I hope to hold the stock for decades, I’m looking forward to receiving many, many more.
Legal & General is now forecast to yield 9.14% in 2023 and 9.6% in 2024. Normally, such dizzying yields would have me running for cover, but these really do look sustainable. The latest interim distribution of 5.71p was 5% higher than last year’s 5.44p.
Dividends are never guaranteed but L&G is generating huge amounts of capital. It would be nice to get some share price growth as well, at some point. It will come, given time.
A stock market crash and global recession could cast a shadow over the company, but since I’m holding for the long term, I have time to recover. If L&G shares do get even cheaper, I’ll dive in and buy more. In fact, I might buy anyway. It is my favourite FTSE 100 stock, after all.
