Legal & General (LSE: LGEN) shares are finally showing signs of life. They’re up 11.2% over the past year, and with a trailing yield of 8.2%, investors have enjoyed a total return close to 20%.
That’s not half bad, but owning the stock’s still been a frustrating ride. The Legal & General share price is only 14% higher than it was five years ago. At around 260p today, it’s roughly where it stood a decade ago. That’s despite the FTSE 100 as a whole trading near all-time highs. Blue-chip Aviva has delivered far stronger growth.
I bought into the insurer in 2023, alongside M&G and Phoenix Group Holdings. All looked like bargain high-dividend stocks. But M&G and Phoenix have grown up twice the speed over the last year. And they still pay bags of income.
FTSE 100 underperformer
On 6 August, Legal & General published what it called an “excellent” set of first-half numbers. Core operating profit rose 6% to £859m while IFRS pre-tax profit jumped 28% to £406m. Net debt fell from £4.71bn to £3.39bn.
CEO António Simões said the outlook was positive and reaffirmed a pledge to return more than £5bn to investors through dividends and share buybacks over three years.
That sounded encouraging, but the City wasn’t fully convinced. On 12 August, RBC Capital Markets cut its price target from 220p to 200p, warning parts of the business remained fragile. Next day, JP Morgan trimmed its price target from 290p to 275p. Analysts worry about profitability in bulk annuities, weaker earnings growth in asset management and dividends not fully covered by free cash flow.
Strong income, weak growth
With competition in bulk annuities intense and markets jittery as they wonder how long the recent bull run can last, sentiment around the stock remains cautious.
Adding to my concern is the valuation. The price-to-earnings ratio looks stretched at 89 after some sharp earnings per share drops in recent years. That’s a pretty dizzying P/E and suggests all is not quite as it should be.
Dividend do the heavy lifting
The consensus one-year price forecast is just 261.8p, around 0.5% above today’s 260.6p. This suggests capital growth will be limited. A market wobble could easily knock it lower, especially if falling asset values hit the balance sheet. I’d love the stock to suddenly take off, but I can’t see it happening either.
Analysts reckon the yield could hit 8.45% in 2025. That would lift the total return to 8.95%, turning a £10,000 stake into £10,895. Once again, the dividend’s doing the work here. Shareholder payouts are going to grow at a fairly slow pace, with the board targeting annual increases of just 2%. That will still lift the yield to a forecast 8.58% in 2026.
Legal & General still looks a stock that income-focused investors might consider buying. I’m happy to keep holding and reinvesting dividends while I wait for the shares to wake up. Patience is required. But over the long term, I expect to get my rewards, from growth as well as income.
