Legal & General and National Grid shares could be undervalued 17% and 25%!

Could Legal & General shares — along with those of National Grid — be brilliant buys for value investors today? Royston Wild takes a look.

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Legal & General Group (LSE:LGEN) and National Grid (LSE:NG.) shares have experienced significant price weakness in recent weeks. In both cases, investors have been spooked by groundshaking strategy updates from the firms.

But in the aftermath, there have been signs of strong dip-buying from retail investors. Legal & General is especially popular: today it’s in the top five of most-bought shares among both Hargreaves Lansdown and AJ Bell customers.

I’m not surprised by this, to be honest. As the table below shows, both FTSE 100 companies trade at a significant discount to the 12-month price targets of City analysts.

CompanyCurrent share price12 month share price targetDiscount
Legal & General227.5p267.4p16.8%
National Grid897p1,104p24.7%

Of course there’s no guarantee that either stock will reach those average price targets. But I still believe both shares are worth serious consideration from value investors. Here’s why.

Legal & General shares plummeted chiefly because of the firm’s new plans to cool the pace of dividend growth.

The business intends to grow 2024’s full-year dividend by 5%, as in recent years. But it intends to reduce annual growth to 2% between next year and 2027.

Its reputation as a generous dividend payer is one of Legal & General’s unique selling points. So on one hand, I can understand why the market has given the news a big thumbs down.

Still, I can’t help but feel that investors have overreacted here. Dividends haven’t been cut, after all. What’s more, the firm plans to balance out slower payout growth with share buybacks. It plans to kick this off with a £200m stock repurchase this year.

The financial services giant looks in good shape to hit these targets too. With a Solvency II ratio of 224%, it has one of the greatest balance sheets in the sector.

Investors now can get a 9.4% dividend yield for 2024 if they buy Legal & General shares. A sudden economic downturn could put pressure on that capital ratio, and in turn future dividends. But as things stand today, the firm looks in pretty good shape to me.

National Grid

Unlike Legal & General, power grid operator National Grid will reduce dividends per share in the near future.

In May it announced plans to spend £60bn over the next five years to fund its green ambitions. This meant the issuance of £7bn worth of new shares, and the spread of the total dividend pot across a greater number of shares.

I’m not shocked to see National Grid shareholders head for the exits. Its appeal as a reliable dividend stock has also been eroded by the decision to cut cash rewards. On top of this, company’s new strategy to build its asset base by 10% a year also comes with significant execution risk.

But I also think the scale of the sell-off represents an attractive dip opportunity. As a long-term investor, I actually like the firm’s plans to better capitalise on the rapidly growing green economy.

This in turn could underpin strong dividend growth from this point on. Indeed, National Grid wants to start building annual dividends straight after the rebasement happens.

It’s also important to note that National Grid shares still provide a healthy 5.4% dividend yield. If I had spare cash to invest I’d consider investing here for passive income.

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.

Royston Wild has positions in Legal & General Group Plc. The Motley Fool UK has recommended Aj Bell Plc and Hargreaves Lansdown Plc. 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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