A poor start to 2024 means the Legal & General Group (LSE:LGEN.) share price is currently sitting at 230p. Like many FTSE 100 shares, the financial services giant has fallen out of favour with investors as hopes of swingeing interest rate cuts have receded.
As an existing shareholder, I’ve just added more of its shares to my portfolio however. Its low price-to-earnings (P/E) ratio and sky-high dividend yield encouraged me to open a position in August. I chose to increase my stake in the business on Tuesday (13 February) too.
And as I’m about to show, Legal & General offers stunning all-round value. In fact I think it could be undervalued by double-digit percentages.
Low valuation
I’ve come to this conclusion by considering the forward earnings multiples of some of Legal & General’s major rivals. The ratios of these major UK, US and European shares can be seen in the table below.
| Company | Forward P/E ratio |
|---|---|
| Zurich | 12 times |
| Aegon | 6.9 times |
| Aviva | 9.6 times |
| AIG | 9.4 times |
| Sun Life | 11 times |
| Prudential | 10 times |
The average P/E ratio for these six financial companies stands at 9.8 times for their current financial years. By comparison, the corresponding multiple for Legal & General shares sits further back at 8.4 times. Only Dutch rival Aegon has a lower valuation today.
To bring the Footsie company up to that industry average close to 10 times, it would need to be trading at 268p per share. That’s a 14% premium to its current share price.
Stunning dividend yield
Okay, that’s a handy discount rather than a spectacular one. But when I also consider Legal & General’s superior dividend yield, its appeal as a value stock looks very, very attractive, at least in my opinion.
| Company | Forward dividend yield |
|---|---|
| Zurich | 6.7% |
| Aegon | 6.4% |
| Aviva | 8.3% |
| AIG | 2.2% |
| Sun Life | 4.5% |
| Prudential | 2.2% |
The prospective yield for the British firm’s six chief rivals sits at a decent 5.1%. This sits way below the 9.3% dividend yield currently offered up on Legal & General shares.
Why I bought the shares
The Footsie company hasn’t had the best time of late as the cost-of-living crisis has impacted financial services demand. Legal & General’s operating profit basically flatlined in the first half of 2023, at £941m.
Full-year results scheduled for next month (6 March) are likely to show that these tough conditions persisted in the second half. And if interest rates fail to fall markedly the company could struggle to grow earnings again in 2024.
But this hasn’t dented my enthusiasm for the stock. This is because I buy shares for the long haul, say a decade or longer. And over this sort of timeframe the profits outlook remains hugely encouraging. Demand for its protection, retirement and wealth products is likely to rise strongly amid rapid demographic changes across its global markets.
And in the meantime, Legal & General’s cash-rich balance sheet should allow it to continue paying market-smashing dividends. I think this is one of the FTSE 100’s greatest value stocks right now.
