Is this FTSE dividend superstar also one of its best bargains?

FTSE asset manager Legal & General pays an 8%+ dividend yield, has a strong core business and looks very undervalued to me.

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I’ve owned shares in FTSE asset manager Legal & General (LSE: LGEN)for so long now, I sometimes forget how good it is.

It’s only when I embark on my quarterly review of my investments that I remember and think I should buy more.

It’s no different now.

Superstar dividend payer

For a start, it’s one of the very few companies in any of the main FTSE indexes that yields 8%+.

It increased its dividend in 2023 by 5% from the previous year – to 20.34p. On the current share price of £2.50, this gives a yield of 8.1%.

If I invested £10,000 in the stock now, I would make £810 this year in dividends. If the yield averaged the same over 10 years, and I reinvested the dividends, I would have £22,418 in total. This would pay me £1,739 a year, or £145 a month.

Over 30 years, on the same basis, it would grow to £112,665 and would pay me £8,738 a year in dividends, or £728 a month!

Are the high dividends sustainable?

The level of dividends paid by a firm depends on its earnings and profits over time. If these decline, then the chances are that the dividends will drop as well.

One risk for the stock is a new global financial crisis. Another is that its debt-to-equity ratio of 3.8 is higher than the 2.5 or so considered healthy for investment firms.

However, for Legal & General, analysts’ expectations are that earnings will grow 23% a year to the end of 2026. Analysts’ forecasts are that earnings per share will rise by 24% a year to that point.

2023 saw it make an operating profit of £1.67bn, against 2022’s £1.66bn. The firm also generated a Solvency II operational surplus of £1.82bn last year, up from £1.8bn the year before. It forecasts cumulative Solvency II capital generation of £8bn-£9bn by the end of this year.

It is a leader in the UK Pension Risk Transfer (PRT) market, which should act as a powerful engine for growth. This market involves a company being paid by other firms to take over the running of their pension schemes.

It is also a top 10 provider in the lucrative US PRT sector. This has enormous growth potential, as $3trn of defined benefit pension schemes have yet to be transferred.

One of the best FTSE bargains?

Despite its recent price rise after the good 2023 results, the stock still looks very undervalued against its peers.

It currently trades on the key price-to-book (P/B) measurement of stock value at 3.1. This compares to a peer group average of 3.6, so it is cheap on that basis.

How cheap? A discounted cash flow analysis reveals the stock is around 57% undervalued.

Therefore, a fair value would be around £5.81 a share, against the current £2.50.

This doesn’t necessarily mean it will ever reach that price, of course. But it confirms to me that it looks to be one of the best bargains in the FTSE.

Given this, its big yield, and its strong growth prospects, I will buy 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.

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