Legal & General’s (LSE: LGEN) share price has fallen around 5% from its 12-month 31 January high.
The price trend has broadly tracked that of the FTSE 100 in which it trades. But it now looks even more of a bargain to me than it did before.
How undervalued does it look?
On the key price-to-book (P/B) measurement of stock value, it currently trades at just 3. This compares to a peer group average of 3.5, so it’s cheap on that basis.
It also looks cheap at its price-to-sales (P/S) ratio of just 1.2, against a competitor average of 1.5.
But how cheap exactly? A discounted cash flow analysis using several analysts’ figures and my own reveals it to be around 59% undervalued at the current price of £2.44.
Therefore, a fair value would be around £5.95, although this doesn’t guarantee it will ever reach that price.
However, it confirms to me that among the many bargains in the FTSE 100, Legal & General looks like one of the best.
Strong growth outlook?
Earnings and profits drive shareholder returns from a stock’s price and dividends over the long term.
If these key drivers decline over the years, then both a share’s price and dividend are likely to fall. Conversely, they are both likely to rise if earnings and profits grow consistently over time.
One risk to these for Legal & General is a new global financial crisis, of course. 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, consensus analysts’ estimates are that earnings will rise by 22.9% a year to end-2026. Earnings per share are expected to grow by 24.1% a year to that point. And return on equity is projected to be 33.7% by the same time.
The company remains a leader in the UK Pension Risk Transfer (PRT) market, which should act as a powerful engine for growth. This market is one where firms pay another company to run their pension schemes.
It’s 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.
Big dividend payer?
In 2023, Legal & General increased its dividend by 5% — to 20.34p. On the current £2.44 share price, this gives a yield of 8.3%. This makes it one of the very few firms in the leading FTSE 100 index that pays a yield of 8%+.
So, if I invested £10,000 now in the stock, I would make £830 this year in dividends. Over 10 years, if the yield averages the same, I’d have made £8,300 to add to my £10,000.
However, if I reinvested the dividends back into the stock, then after 10 years I’d have a total of £22,868.
And after 30 years, on the same provisos, I’d have £119,583. This would pay me £9,493 a year in dividends or £791 every month!
This high dividend and its major undervaluation and strong growth prospects are why I’m buying more of the stock now.
