Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has a strong core business awash with cash.

| More on:
Businesswoman analyses profitability of working company with digital virtual screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Legal & General’s (LSE: LGEN) share price is still significantly lower than its level of early March 2023.

Back then it dropped around 20% in two weeks, as did several UK financial firms, on fears of a new financial crisis. The failures of Silicon Valley Bank and then Credit Suisse prompted these concerns.

The crisis never came, but many of these stocks stayed low and I have bought several of them.

In my view, the entire sector is undervalued against its European equivalent. This issue began after the 2016 Brexit vote and the mini-crisis of March 2023 made it more pronounced.

Strong capital base

A genuine new financial crisis does remain a risk for the sector and for Legal & General in particular. But this is mitigated by the strengthening of these firms’ capital bases that happened after the 2007 financial crisis.

Many now have Solvency II ratios of 200%+, against a regulatory standard of 100% — Legal & General’s is 230%.

Another risk is that debt ratios continue to climb past a safe level. Many UK financial sector firms finance expansion through debt rather than equity, as debt is generally cheaper.

This makes sense for them, as their business generates high levels of cash that makes these obligations relatively easy to service.

Legal & General’s debt-to-equity ratio is 3.8, against the 2.5 or so considered healthy for insurance and investment firms. I’d like to see this trending lower over the next three years.

However, it is on track to generate cumulative Solvency II capital of £8bn-£9bn by the end of this year. Additionally, analysts’ estimates are that earnings will grow by 24% a year to end-2026.

This should also enable it to keep paying high dividends, in my view.

A top dividend payer

Few companies in the FTSE 100 pay yields of 8% or more, but Legal & General is one.

It increased its dividend in 2023 by 5%, to 20.34p. On the current share price of £2.47, this gives a yield of 8.2%.

If I invested £10,000 now in the stock, then I would make £820 this year in dividends. If the yield averaged the same over 10 years, and I reinvested the dividends, I would have £22,642.

Over 20 years, on the same basis, this would grow to £51,265, and after 30 years to £116,073.

That would pay me £9,108 a year in dividends, or £759 a month!

Undervalued against competitors?

Of course, there is not much point in receiving high dividends if these gains are then wiped out by share price losses.

This is why I only buy high-dividend-paying stocks that also look undervalued against their peers to me.

Legal & General currently trades on the key price-to-book (P/B) measurement of stock value at 3.  This compares to a peer group average of 3.4, so it looks cheap on that basis.

How cheap? A discounted cash flow analysis reveals that the stock is around 59% undervalued.

Therefore, a fair value would be around £6.02 a share, against the current £2.47. This does not necessarily mean it will ever reach that price, of course.

But it does indicate to me that it is very good value, as well as paying very high dividends.

So, on that basis, I will be buying more of the stock very soon.

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 no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »

Photo of a man going through financial problems
Investing Articles

Down 16% in a month! Can this FTSE 100 stock recover in April?

Grabbing low-priced shares with long-term growth potential is an investor's dream. I think this FTSE 100 share may be an…

Read more »