Legal & General shares (LSE: LGEN) are underperforming the market dramatically today (Wednesday 12 June). While the FTSE 100 is up about 0.7%, the insurer’s share price is down about 3.7% (making the stock the worst performer in the index).
So, what’s going on with the popular dividend stock? And is this a great buying opportunity for long-term investors?
A new strategy
The reason the shares are down nearly 4% is that Legal & General has set out a new strategy and financial targets at its Capital Markets Event. And while there’s some good news for investors, there are also some things in the update that some are likely to find a little disappointing.
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In terms of its new strategy, the company is going to simplify its structure by bringing together Legal & General Investment Management (LGIM) and Legal & General Capital (LGC) to create a single asset management division. “Our vision is for a growing, simpler, better-connected L&G, focused on three core business divisions,” said new CEO Antonio Simoes.
As for the new financial targets, the company is aiming to generate annualised growth of 6-9% in core operating earnings per share between 2024 and 2027. It’s also targeting an operating return on equity of over 20%.
Dividend news
Where things get interesting is regarding returns to shareholders. The company has said it plans to “return more to shareholders” between 2024 and 2027 and that it’s going to kick things off with a share buyback of £200m in 2024 (with more buybacks expected in the years ahead). That’s good news as buybacks can boost earnings per share.
But here’s the catch – while the group plans to increase its dividend payout by 5% this year, between 2025 and 2027 it’s only planning to hike the payout by 2% per year.
I suspect it’s this dividend growth news that has hit the share price. That’s because 2% growth isn’t much. If inflation was to remain high between 2025 and 2027, the payout for investors could actually decrease over time in real terms after inflation is factored in.
I’m not surprised by this income news though. Recently, I’ve been warning that the new CEO could adjust the dividend policy. Back in January, I wrote: “One risk to be aware of here is that the financial services company has a new CEO. And he could decide to change the capital allocation policy.”
Time to buy?
Should investors consider buying the stock after today’s share price drop?
I think so.
I continue to believe that the company has plenty of growth opportunities. Not only is there significant potential on the investment management side of the business (its private markets division looks interesting to me) but there’s also a lot of scope for growth in the institutional retirement business.
And with the stock trading on a P/E ratio of 10.5, it looks good value. Add in a dividend yield of 9% and there’s a lot to like.
That said, investors need to be prepared for share price volatility with this stock. As a financial services company, its profits can swing around a lot as markets fluctuate.
So, I think diversification is key. If I was buying Legal & General shares today, I’d also consider buying some more defensive dividend shares to reduce my portfolio’s volatility.
