An 8.7% yield but down 17%! This FTSE 100 stock looks a bargain to me

Down 17% from March, but with a strong core business, an 8.7% yield, and undervalued to its peers, this FTSE 100 stock looks a bargain to me.

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Legal & General (LSE: LGEN) has long been a star financial stock in the FTSE 100. Since early March, though, it has seen its share price drop.

The key reason for this, I think, was market jitters surrounding the mini-banking crisis around that time. This resulted from the collapse of the little-known Silicon Valley Bank and increased with the failure of Credit Suisse.

Fears of a new financial crisis remain a risk for the shares, of course. Another is that inflation and interest rates remain high, acting as a deterrent to new client business.

However, the 17% drop seen in Legal & General’s shares from then has looked completely unwarranted to me.

Solid core business

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.

In its 2022 results it said 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. Coverage of just 100% for an investment and insurance company meets all the regulatory requirements.

Is it a bargain?

Just because a stock has dropped dramatically does not necessarily mean it is undervalued. It may simply be that the business itself is just worth less now than it was before.

To ascertain whether a company is undervalued, I start by comparing its price-to-earnings (P/E) ratio with those of its peers.

Currently Legal & General’s is 6.6, Prudential’s is 8.6, Hansard Global’s is 13.2, Admiral’s is 19.4, and Beazley’s is 29.8.

Therefore, Legal & General looks undervalued on this measurement compared to its peer group.

How much is it undervalued?

By how much is best answered, I think, by use of the discounted cash flow (DCF) valuation. Given the assumptions involved in this, I do not rely on my figures, but look at several analysts’ DCF valuations.

The core assessments for Legal & General are between 50% and 57% undervalued. Taking the lowest of these would give a fair value per share of £4.44.

This does not mean that the stock will reach that point, of course. But it does underline to me that the shares currently offer very good value.

Big passive income stock

Last year, Legal & General paid out a total of 19.37p per share. Based on the current share price of £2.22, this gives a yield of 8.7%.

Its interim dividend this year was 5.71p, compared to last year’s 5.44p. This suggests to me that the total dividend for this year may be even higher than last year’s.

Even if the yield remains the same, though, a £10,000 investment would make £870 this year. Over 10 years, if the rate remained the same, this would total £8,700 to add to the initial £10,000 investment. This is over and above share price gains or losses and tax obligations incurred, of course.

Although I already hold shares in the company, I am seriously considering buying more. I think it will recoup all this year’s 17% loss at some point. I also think it will gradually converge towards its fair value over time, in addition to paying excellent dividends. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Legal & General Group Plc. The Motley Fool UK has recommended Admiral Group Plc and Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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