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.
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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.
