What will it take to get investors to show some love for Legal & General Group (LSE: LGEN) shares?
The stock is trading close to post-pandemic lows and now has a 10% dividend yield. That’s one of the highest in the UK market. City analysts don’t expect the payout to be cut either.
Indeed, half-year results on 7 August included details of a further 5% increase to the interim dividend, in line with previous guidance from new chief executive António Simões.
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One problem may be that Mr Simões has big shoes to fill. I suspect the market isn’t yet completely confident he can maintain the long-term growth record of his predecessor Sir Nigel Wilson.
Mr Simões’ decision to combine the two halves of L&G’s asset management business into one unit also isn’t without risk – they’re quite different businesses.
Why I’m on board
Investing in shares always carries some risk. But as a long-term shareholder, I’m happy to trust that Legal & General’s proven culture and 188-year history will continue to provide the kind of reliable continuity I’m seeking.
I’m also (mostly) reassured by this week’s results. The group’s core operating profit for the half year – a key measure – rose slightly to £849m.
L&G’s operating return on equity increased to 35.4%, up from 28.6% one year ago. Return on equity is an important measure of profitability for financial businesses.
Although there’s no guarantee the dividend will remain safe, I was happy to see surplus cash of £731m generated during the first half of the year, similar to last year’s figure of £752m. This is equivalent to around 12p per share – enough to cover the 6p interim dividend twice over.
Pensions slowdown?
Much of Legal & General’s growth in recent years has been driven by bulk annuity deals. These are when the company takes over responsibility for final salary pension schemes from employers.
The first half of this year saw a sharp slowdown in these deals. Legal & General closed £1.5bn of business across 15 deals, compared to £5bn and 20 deals during the same period last year.
This may seem alarming, but I think it’s fair to say these large deals can be quite lumpy. They don’t come in an even flow.
Management is still confident in growth prospects for bulk annuities and say that written or exclusive deals are now up to £5bn this year, with £24bn+ in the UK pipeline.
Longer term, there’s also potential for greater US growth as the business continues to expand. Legal & General is one of very few UK asset managers with the scale to match larger US rivals.
What I’d do now
Legal & General is already one of the larger holdings in my income portfolio. Although I’d be happy to buy the shares at this level, I don’t want my exposure to one company to become too unbalanced.
However, if the company continues to look cheap to me while performing as expected, I may add more shares to my holding later this year.
