Legal & General (LSE:LGEN) shares have enjoyed a solid bounce in recent weeks following earlier price weakness. I’m not surprised given the excellent value for money the FTSE 100 company currently offers. I’ve increased my own holdings in recent weeks.
Today, Legal & General’s share price trades on a forward price-to-earnings (P/E) ratio of 9.4 times. The firm also carries enormous dividend yields for the next two years.
For 2024, the financial services provider sports an 8.7% dividend yield, well above the 3.8% average for Footsie shares. And for next year the yield jumps towards double-digit territory, at 9.2%.
But how realistic are current dividend forecasts? And should I think about increasing my holdings even further?
Payout growth
Legal & General has a brilliant record of lifting dividends in modern times. Excluding 2020 when Covid-19 slammed profits, the FTSE company has raised the shareholder payout every year since the 2008 financial crisis.
City analysts are expecting this proud record to continue, too. Last year’s reward of 20.34p per share is tipped to increase to 21.38p in 2024. Another rise is predicted for 2025, to 22.57p.
But past performance is no guarantee of future returns. And potential investors may be put off by the poor dividend cover on offer. This sits at 1.2 times for both 2023 and 2024.
Dividend cover
This doesn’t provide much wiggle room should profits disappoint. And in the current climate, there’s a higher-than-normal chance that earnings will come in lower than forecast.
Demand for life insurance, and wealth and retirement products like pensions, has slowed as consumers have reduced non-essential spending. This remains a threat going forward too, if interest rates remain above the norms of the past 15 years.
But I don’t think this will derail Legal & General’s progressive dividend policy. I feel it has the balance sheet to weather any bumps in the road and continue growing cash payouts.
Cash rich
The company’s Solvency II capital ratio fell during 2023 but remained above 200% at the close of the year. Indeed, at 224% as of December, it remains one of the strongest in the sector.
Meanwhile, capital generation at Legal & General continues to exceed shareholder payouts. Since 2019, this has surpassed dividends by £800m.
This provides dividend projections under the current capital allocation programme with added strength. Legal and General has vowed to raise dividends by 5% each year during the five years to 2024.
The business is yet to declare its capital targets and dividend programme from 2025. This was sadly absent from this month’s full-year trading update. But the way things are going, more impressive (and increasingly large) dividends can be expected.
Here’s what I’m doing now
Legal & General is one of the key holdings in my portfolio today. And I plan to continue steadily building my stake in the business.
Those gigantic dividend yields for 2024 and 2025 look pretty well protected. And I expect the FTSE firm to continue paying market-beating dividends long into the future, driven by rising demand for its retirement and wealth products.
