The last year brought more disappointment for the Legal & General (LSE: LGEN) share price. Despite the occasional flash of excitement, it’s slumped more than 6% in the past 12 months. Sadly, this isn’t a one-off.
Shares in the FTSE 100 insurer and asset manager are down 25% over five years. It’s not alone in this. Other FTSE financials have struggled amid higher inflation, rising interest rates and wider stock market volatility.
Yet I still see Legal & General as a brilliant investment, thanks to its blockbuster dividend. The shares currently yield 8.6%, more than double the return from a best-buy savings account or average bond fund.
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But am I fooling myself? Those tumbling shares will have wiped out much of the dividend income investors have received.
Is the dividend worth it?
A yield this high also signals trouble. It suggests the share price has struggled – and it has. It also raises questions about sustainability.
The forecast yield for 2024 is an eye-catching 9.8%, but cover is expected to be just 1.1 times earnings. Investors typically prefer dividends to be covered at least twice by earnings to allow for mishaps.
Even so, the board remains bullish. It’s forecast cumulative Solvency II capital generation of £5bn-£6bn by 2027, which should support payouts. It’s also hinted at returning more capital to shareholders through a potential share buyback in March.
Of course, neither dividends nor buybacks are guaranteed, but both currently seem secure. What about that share price though?
Legal & General’s a financial powerhouse, a big name in pensions, insurance, investment management, annuities and equity release. On 4 December, the company flexed its muscles with a solid trading update, demonstrating resilience in a wobbly market. Operating profits were up, and the group confirmed it was on track to meet ambitious five-year targets.
The shares jumped 5% on the day but failed to sustain momentum. This is partly due to concerns over the UK economy. However, the biggest shadow is the outlook for interest rates.
I’d like some growth with my income please
Markets remain uncertain about how many base rate cuts the Bank of England will deliver this year. Predictions vary from one to four, depending on any given day’s news.
This is critical for Legal & General for two reasons. First, lower rates reduce borrowing costs for businesses and consumers, potentially boosting economic activity. Second, they lower yields on cash and bonds, making dividend-paying stocks like Legal & General more attractive by comparison.
I believe a few cuts are likely over the next 18 months, which could breathe life into Legal & General’s share price. However, I don’t expect a return to near-zero rates.
I’m cautious about the stock’s valuation. It’s no longer cheap, trading at more than 32 times. That’s roughly double the FTSE 100 average price-to-earnings ratio of around 15. That means the shares aren’t a sure-fire winner.
So is it game over for Legal & General’s share price? Given its strong fundamentals, diversified business model and generous dividend, I think it remains a compelling long-term buy-and-hold for me.
Yet I have to accept that 2025 may still bring disappointment for the share price. If it does, at least the dividends should soften the blow.
