Legal & General (LSE: LGEN) shares have dropped 11% from their 7 February one-year traded high of £2.65.
As a stock’s dividend yield moves in the opposite direction to its price, this has increased its return to 9%.
So, investing £11,000 (the average UK savings) would make £990 in first-year dividends. This would rise to £9,900 after 10 years and to £29,700 after 30 years.
That said, using the standard investment practice of ‘dividend compounding’ would increase these returns dramatically. This involves reinvesting the dividends back into the stock that paid them.
Doing this would make £15,965 in dividends after 10 years, not £9,900. And after 30 years, these would increase to £151,036 rather than £29,700.
By then, the total value of this shareholding would be £162,036. And that would pay £14,583 every year in dividend income! None of this is guaranteed, of course.
Analysts forecast the yield will increase
That said, analysts forecast the FTSE 100 insurance and investment giant will raise its dividends in each of the next three years.
The projections are for payments of 21.8p this year, 22.2p next year, and 22.6p in 2027.
These would generate respective yields on the current share price of 9.2%, 9.3%, and 9.5%.
By comparison, the current average dividend yield of the FTSE 100 is just 3.4% and of the FTSE 250, 3.3%.
Meanwhile, the ‘risk-free rate’ (the 10-year UK government bond yield) is 4.6%.
Are these figures well-supported by the business?
It is earnings growth that ultimately drives any firm’s dividends higher over time. A risk to Legal & General’s is any new surge in the cost of living. This may cause clients to close their investment accounts.
However, analysts also forecast that its earnings will grow by a stunning average of 39% every year to end-2027.
H1 2025 results saw earnings per share up 9% year on year to 10.94p – top of its 6%-9% target range. This resulted from increasing synergies across each of the three main businesses, according to the firm.
Institutional Retirement’s operating profit jumped 11% to £618m. Asset Management’s revenue improved 2% to £500m. And Retail’s operating profit was 3% higher at £237m.
Sharpened focus through recent deals
The firm is also bullish about these key operations following recent deals.
I think the most notable of these was the February $2.3bn (£1.71bn) deal with Japanese insurance giant Meiji Yasuda. Legal & General will use £400m to fund its high-value US Pension Risk Transfer business expansion. And £1bn will be returned to shareholders in a buyback, which tends to support share price gains.
Meiji Yasuda will also outsource investment management of some of its US assets to the UK firm. This will boost Legal & General’s assets under management and its related fee income.
A share price bonus as well?
Legal & General’s extremely strong projected earnings growth should also drive big gains in its share price.
To ascertain how much, I ran a discounted cash flow analysis. This pinpoints where any stock should be priced, based on cash flow forecasts for the underlying business.
In Legal & General’s case, it shows the shares are 54% undervalued at their current £2.37 price, therefore, their fair value is £5.15.
Given these earnings forecasts, extreme undervaluation and massive yield potential I will buy more of the shares very soon.
