Legal & General (LSE: LGEN) is one of the most popular stocks in the FTSE at the moment. Last week, it was actually the most bought stock on Hargreaves Lansdown’s investment platform.
With its high dividend yield, I can see why investors like Legal & General. Is it the best stock to buy in the Footsie today though? I’m not so sure.
Permanently cheap
From a valuation perspective, Legal & General shares do look quite attractive. Currently, they trade on a price-to-earnings (P/E) ratio of around 9.4. That’s about 30% below the market average.
However, one thing I’ve learnt is that a low valuation doesn’t always translate to share price gains. We can see that here. This stock’s traded at a low valuation for years and it hasn’t helped the share price. Over the last five years, the stock’s actually gone backwards (by nearly 10%).
This lack of share price growth is disappointing. Especially, when you consider that plenty of other FTSE shares (eg BAE Systems, Ashtead, 3i Group) have risen more than 100% (ie doubled investors’ money) over that time period.
Big dividends
Of course, there’s the high dividend yield here. This has offset the lack of share price gains to a degree. Last year, Legal & General paid out a total of 20.3p per share in dividends. That translates to a yield of 8.3% today, which is no doubt attractive.
With the forward-looking yield sitting at nearly 9% however, I’m starting to wonder if the market’s having some doubts in relation to the sustainability of the big payouts. Could a dividend cut be on the horizon?
The company does have a new CEO (António Simões). Could he change the dividend policy and reduce the payout to reinvest more money for future business growth? Potentially. After all, if he reduced the dividend by a third, the yield would still be near 6% – well above the market average.
It’s worth noting that in the company’s full-year results it said: “The Board believes it has considerable opportunities available to deliver attractive returns to shareholders by retaining and investing capital within the Group.”
Is that the company dropping a hint that it would like to reduce its payout in the future? Maybe.
Economic challenges
Another thing that’s worth mentioning here is that weak economic conditions and higher interest rates are presenting a few challenges for the financial services company.
Last year, for example, profits in the company’s alternative investments and property arm (Legal & General Capital) were flat. Meanwhile, profits in its investment arm (Legal & General Investment Management) fell nearly 20%.
The company did see solid growth of 10% in its retirement division (Legal & General Retirement Institutional). This was thanks to success in the pension risk transfer space (the company helps businesses derisk their pension liabilities). However, overall, business performance was average.
In other words, the company’s not firing on all cylinders at the moment.
My view
Now I don’t want to sound too bearish on Legal & General. All things considered, I think it’s a decent company. I’ve owned the stock in the past.
However, for me, it’s not the best stock to buy in the FTSE today. Right now, I see a few other opportunities that look a bit more compelling.
