Like many UK financial firms since the 2016 Brexit decision, Legal & General’s (LSE: LGEN) share price has struggled.
This bearishness was compounded in March/April last year by fears of a new global financial crisis. These were caused by the failures of Silicon Valley Bank and later Credit Suisse.
Both sell-offs overlooked the huge capital-boosting measures ordered by the Bank of England after the 2007 financial crisis.
They also overlooked the fundamentally strong businesses and growth prospects in several UK financial firms, in my view.
More positively for me, and other investors, it has left many such shares looking very undervalued. And it has boosted the already high dividend yields offered by some, including Legal & General.
Strong capital foundations
A genuine new global financial crisis does remain a risk for the stock, of course. And its current debt-to-equity ratio of 3.8 is higher than the 2.5 or so considered healthy for investment firms.
This said, Legal & General has a Solvency II ratio of around 230%, against an industry standard of just 100%.
It is also on track to generate cumulative Solvency II capital of £8bn-£9bn by the end of this year.
Consensus analysts’ expectations are now for its earnings to grow by 22.9% a year to the end of 2026. Earnings per share are forecast to increase by 24.1% a year to that point. And return on equity is predicted to be 33.7% by then.
Such growth should further enhance its already strong capital foundations, in my view.
Further dividend increases?
It should also drive further rises in dividend payments, I think.
2023 saw it increase its dividend by 5%, to 20.34p. On the current share price of £2.44, this gives a yield of 8.3%.
If I invested another £10,000 now in the stock, then I would make £830 this year in dividends. If the yield averaged the same over 10 years (which is not guaranteed), and I reinvested the dividends, I would have £22,868.
Over 20 years, on the same basis, this would grow to £52,293, and after 30 years to £119,583.
That would pay me £9,493 a year in dividends, or £791 a month!
An unmissable bargain?
That said, high dividends are of little use if they are wiped out by big price losses.
To mitigate this risk, I only buy high-dividend-paying shares that also look undervalued against their peers.
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 3.6, so it looks a bargain on that basis.
How much of one? A discounted cash flow analysis reveals that the shares are around 58% undervalued.
Therefore, a fair value would be around £5.81, against the current £2.44. This does not guarantee they will ever reach that price, of course.
But it does underline to me that the shares look very good value, as well as paying very high dividends.
Consequently, for me it is an unmissable bargain and I will be buying more very soon.
