The Legal & General (LSE: LGEN) share price is having a shocker after falling 18.25% over the last five years.
To be fair, it’s in positive territory over the last 12 months, climbing 6.68%, but it’s been sliding again in recent months. The plus side is that it offers one of the most dazzling dividends on the blue-chip index, with a trailing yield of 9.22%.
So does that sky-high yield cancel out a poor stock performance? A back-of-a-fag-packet calculation suggests long-term investors will still be up around 25% over that period, so arguably it does. It’s not brilliant though.
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FTSE 100 dividend income hero
Normally when a yield heads towards double digits, investors fret over whether the dividend’s sustainable. In this case, I’m not too worried. Legal & General has a solid track record of dividend increases, as this chart shows.
Chart by TradingView
Growth is set to slow though. The board hiked the dividend by 5% to 6p a share for 2024, but this will be followed by more modest annual growth of 2% thereafter. I find it hard to complain given the high income stream.
The board also announced a £200m share buyback, which is pretty modest but at leasts suggests that L&G isn’t bereft of cash. It’s planning more.
On 7 August, Legal & General posted first-half profits of £849m. While they rose just 1%, that beat analyst forecasts of £834m. It expects 2024 core operating earnings to grow by mid-single digits.
One thing worries me. That increase was driven by annuity sales, which more than doubled to £1.2bn as higher interest rates boosted the income they pay. Demand has spiked as pensioners anticipate falling interest rates, but is likely to decline soon.
The bulk annuity market should help drive earnings in future though, as more companies pass on their pension scheme obligations. Competition’s tough though, as rival insurers are also vying for the business.
This stock isn’t dirt cheap
Most of the big FTSE insurers and asset managers are in a similar position to Legal & General. While their shares struggle, yields are heading to 9% and beyond. Abrdn, M&G and Phoenix Group Holdings spring to mind.
What they all need is a good old-fashioned bull market run. Don’t we all? We’ve had one in US tech, but we could do with a broader, deeper stock recovery.
If interest rates fall, so will savings rates and bond yields. That will make the sky-high yields on FTSE financials look even more attractive, persuading income seekers to take a bit more of a punt.
I’ve been saying that all year, but it hasn’t happened yet. When I bought L&G shares last year they were trading at a price-to-earnings ratio of around seven. As earnings stagnate, that’s shot up to 30 times. So it’s not as cheap as it was.
The 17 analysts offering one-year share price forecasts have set a median target of 261.1p, up 18.69% from today’s price. If correct, that would be brilliant, especially once added to the dividend.
I’ve no idea when the Legal & General share price will recover, or whether it will fall further. But while I wait, I’ll reinvest every dividend I receive. Ironically, the longer the recovery takes, the more shares I’ll hold when it finally happens. I’m in this for the long run.
