Is Legal & General’s share price the best bargain in the FTSE 100?

Legal & General’s share price looks very undervalued to me. It also yields 8.3% and seems set to benefit from strong business growth.

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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.

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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