Legal & General (LSE: LGEN) shares have been a popular investment lately. Last year, they were the top stock investment on Hargreaves Lansdown.
Now, following the herd isn’t always a good move. Yet in this case, I like the trend. Looking at the insurer’s dividend yield and valuation, I think the shares could return 20%, or more, by the end of 2024.
Big dividends
Let’s start with the dividend yield here. Because it’s big. Legal & General typically pays dividends twice a year.
Last year, it paid out 13.93p per share (the final payout for 2022) in June and 5.71p per share in September (the interim payout for 2023).
Now, I’m going to assume that the payouts will be 5% higher this year, which is roughly what City analysts expect.
That would put the total dividends for 2024 at 20.6p per share. At today’s share price, that equates to a yield of about 8.5%.
So, there’s a decent return already, and we haven’t even got to capital gains yet.
An undervalued stock
Now, to deliver a total return (capital gains plus dividends) of 20%, the shares would have to rise about 11.5%.
If we apply an 11.5% gain to today’s share price of 243p, it takes the price target to 270p.
I think that’s very achievable. For 2024, earnings per share (EPS) are expected to come in at 26.5p.
So, a share price of 270p would only equate to a price-to-earnings (P/E) ratio of about 10.2.
That’s a low, undemanding valuation.
For reference, the median forward-looking P/E ratio across the FTSE 100 right now is about 13.
Of course, there would need to be a catalyst for the share price increase. But I can see a few potential factors that could drive the earnings multiple higher.
One is falling interest rates. This would most likely decrease the appeal of holding cash savings and increase the appeal of owning dividend stocks.
Another is more interest in value stocks as the global stock market rally broadens out.
It’s worth noting that plenty of brokers have price targets for Legal & General that are well above the 270p mark.
Just today (8 January), Berenberg has raised its target on the stock to 289p. Meanwhile, Barclays and HSBC have price targets of 333p and 315p respectively.
I’ll also point out that the stock traded above 270p early last year. So I don’t think it’s unrealistic to believe that it can get there.
No guarantees
As always though, there are no guarantees with stock market investing.
Legal & General shares can be volatile at times. If there was a market wobble, the share price could fall.
And my 5% dividend increase forecast here could prove to be optimistic. The company could decide to hold its payout flat. Or it could even decide to make a cut. The new CEO could have different ideas on capital allocation.
Overall though, I’m quite optimistic in relation to the stock’s prospects. If I was a dividend/value investor, I would definitely consider buying them for my portfolio.
If I was to buy them, however, I would also buy plenty of other stocks for diversification.
