The Legal & General (LSE: LGEN) share price looks too low to me, judging by those headline figures. They’re based on forecasts for 2025. But even the current 2024 outlook suggests a 9.4% dividend yield with a price-to-earnings (P/E) ratio of 13.
With the end of the year nearly upon us, I suspect the forecasters are probably not far off now. They do seem to be in line with the company’s outlook at interim time, when CEO António Simões spoke of “core operating profit slightly ahead of the prior year and a solvency coverage ratio of 223%“.
He added that the board expects “2024 core operating profit to grow by mid-single digits year-on-year“.
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Share price down
If these forecasts look so rosy, one immediate question shouts out. Why has the Legal & General share price fallen 10% in 2024?
The big thing I can see is fear that the company might not be able to sustain the high dividend. If the 2024 payout comes in as expected, it won’t be covered by forecast earnings.
In fact, predicted earnings per share (EPS) for this year would only cover around 80% of the mooted dividend.
And even in 2025, if the push to a 9.7% yield comes off, we’d still see it just about equalled by EPS. It won’t be until 2026 before we see cover getting noticeably above 100%, and even then the forecasts put it at only a bit above 1.1 times.
Dividend optimism
This might be one of the biggest FTSE 100 dividend yields on the cards for 2025. But I wouldn’t rate it as one of the safest. So why do I still feel so upbeat?
Looking just at dividend cover by earnings for insurance and investment companies can be a bit misleading. Solvency measures and cash flow can play a big part in the short-term, and help sustain the long-term dividend.
At the halfway stage this year, Legal & General did boast that impresssive 223% solvency coverage ratio. The company also said it expects to record “£5bn-£6bn cumulative Solvency II capital generation over three years (2025, 2026, 2027)“.
Dividend policy
And as if to settle my dividend nerves, the update reiterated a healthy cash return policy:
The Board intends to return more to shareholders over the period 2024-27 through a combination of dividends (5% DPS growth to FY24, 2% DPS growth per annum 2025-27) and buybacks (with a first buyback of £200m in 2024 and further similar buybacks)
It’s enabled by a “well-positioned, capital generative businesses in Institutional Retirement, Asset Management and Retail“, we were told.
Cyclical sector
I must stress that the insurance sector can be notoriously cyclical. And a company can go from looking like a must-have buy one month to one that needs to be kept a bargepole away the next.
For that reason, today’s apparently low valuation really might be all the shares deserve right now. But I think investors who understand the business could do well to consider Legal & General as a long-term dividend investment.
