14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Hand of person putting wood cube block with word VALUE on wooden table

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Those with a vested interest in the Legal & General (LSE:LGEN) share price probably don’t pay too much attention to international accounting standards. But if they did, the most observant would see that the company has recently adopted new rules when it comes to the reporting of the profitability of insurance contracts, including annuities and pensions.

The financial services group now recognises profits as it delivers the services, rather than when it receives the premiums. It therefore has to make an assessment as to the timing of cash flows over the lifetime of its policies.

It’s important to note that this doesn’t affect the overall value of these contracts. Instead, earnings are moved from one accounting period to another.

Should you invest £1,000 in Nike right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Nike made the list?

See the 6 stocks

However, it does mean that the company’s in a position to report the estimated value of these earnings streams. And at 30 June, it said its so-called ‘store of profit’ from its insurance contracts was £14.5bn.

Why is this significant?

This is useful because share prices – in theory — are supposed to reflect the present value of future cash flows.

Legal & General’s current (22 November) market cap is £12.9bn.

If it was to sell off its insurance and retirement divisions, these would (on paper) be worth more than the entire group.

But it gets better.

The store of profit doesn’t reflect the contribution of its capital or investment management businesses. These contributed 37.7% to adjusted operating profit during the year ended 31 December 2023 (FY23).

However, based on the anticipated future performance of its retirement and insurance divisions alone, the Legal & General share price is — in my opinion — at least 11% undervalued.

Healthy dividends

And there’s another reason why I like the stock.

The company has a long track record of increasing its payouts to shareholders.

For FY23, it declared a dividend of 20.34p. It’s promised to increase this by 5% in 2024. And by 2% a year from FY25-FY27.

Based on its expected return in 2024 (21.36p), the stock’s presently yielding an amazing 9.7%. The average for the FTSE 100 is 3.8%.

Of course, dividends are never guaranteed.

Source: historical data taken from company annual reports

What does this all mean?

Despite this impressive yield, the company’s share price has stagnated over the past year. Since November 2023, it’s down 3%.

And it’s fallen 15% from its 52-week high, achieved in March.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL22 Nov 20193 Apr 2025Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '25202020202021202120222022202320232024202420252025www.fool.co.uk

I suspect this is because Legal & General derives the majority of its revenue from the UK — 82.5% in FY23 — where there’s little good news to report at the moment.

The economy shrank 0.1% in September. In October, both inflation and government borrowing exceeded expectations. And following the Budget, most economists expect interest rates to remain higher for longer.

The company’s earnings are also affected by the stock market because, at 31 December 2023, it had £186bn of equities on its balance sheet. This means its profits can fluctuate during periods of market volatility.

However, despite these potential challenges, I’m going to keep the stock on my watchlist for when I next have some spare cash.

The group has an enormous pipeline of corporate pension schemes that it hopes to acquire, which should help to support the generous dividend. That’s particularly appealing to an income investor like me.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Nike right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Nike made the list?

See the 6 stocks

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.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »