If I was the vindictive type, I’d say Legal & General (LSE: LGEN) shares have let me down in 2024. They’ve fallen 6.16% year-to-date. Even the blockbuster 9.14% yield doesn’t wholly compensate for that.
This isn’t a one-off slip either. The share price is down 2.95% over 12 months and 17.22% over five years.
Again, let’s be generous. The UK stock market has had a tough run, fighting off the pandemic, energy shock, cost-of-living crisis and interest rate surge. Most FTSE 100 financials have struggled in that time.
Can this FTSE 100 income stock fly next year?
The insurer and asset manager’s underlying business remains strong with solvency at 223%, but growth is hard to come by. First-half results published on 7 August showed core operating profit edging up from £844m to £849m. CEO António Simões expects that to grow by mid-single-digits year on year
L&G’s return on equity jumped from 28.6% to 35.4%. Unfortunately, profit after tax fell from £377m to £223m which cast a shadow over everything. That didn’t concern me too much though. The board is running a modest £200m share buyback and hiked the interim dividend by 5%. And it’s the income I’m primarily after.
I was cheered by its 4 December update stating that L&G remained on track to deliver its operating profit guidance. Simões also forecast a compound annual growth rate (CAGR) of between 6% and 9% in core operating earnings per share from 2024 to 2027. The shares jumped almost 6% on the day in an early Christmas present for me.
So will Legal & General bring me a prosperous New Year? To deliver that, it needs lower interest rates. When central bankers start cutting, ultra-high income stocks like this one should enjoy a re-rating.
I’m looking forward to my next L&G dividend
That’s because higher interest rates give income seekers a decent yield from cash and bonds, without putting their capital at risk. When that reverses, more will chase that income from shares instead.
Next year, the L&G yield is forecast to hit a stunning 9.36%. Dividends are never guaranteed, of course. But with the board anticipating Solvency II capital generation of between £5bn and 6bn through to 2027, I’m optimistic.
The 15 analysts offering one-year share price forecasts for L&G have produced a median target of 264.4p. That’s an increase of 13.38% from today. Combined with that yield, that would give me a very welcome total return north of 22%. We’ll see.
It’s far from guaranteed. If interest rates do fall, that could also reverse the surge in annuity sales, as buyers get less income. Plus there’s the obvious risk that when a yield gets this big, it’s on the way to being unsustainable.
But I remain optimistic. If the board can keep hitting its targets, it will be nicely placed when the sector gets that re-rating. If that doesn’t happen in 2025, so be it. I’ll keep reinvesting my dividends to pick up more stock while I wait for events to swing back in its favour. I’m planning to hold this one for years. At some point, it will come good. Until then, I have my income.
