I’ve held Legal & General (LSE: LGEN) shares in my SIPP for two years now, but I’m not happy with them.
They’re up just 5% over the last year and 7% over two. At today’s 238p, they’re worth less than a decade ago, when they traded around 275p. What makes that harder to swallow is that rival FTSE 100 insurer Aviva is flying by comparison. It’s up 40% in the last year and 140% over five.
Investors will be consoling themselves with the thought that they’ve received plenty of dividend income along the way. It’s what I tell myself. Today my strategy is to reinvest all my dividends and hope that at some point, the stock will take off and I’ll be quids in. But how safe is that dividend?
Lots of income, little growth
Today, the trailing yield is a bumper 9.13%, the second biggest on the entire FTSE 100 after housebuilder Taylor Wimpey. But a high yield often indicates an underperforming share price, and that’s the case here. And ultimately, the company has to generate a lot of cash to fund it.
Legal & General has increased dividends every year since 2010, with one exception. And that was during first pandemic year of 2020 when it froze the dividend per share at 17.57p. Given companies were cutting left right and centre, including Aviva, that’s pretty credible.
Over that 15-year period, the dividend has climbed at a compound growth rate of 11.75% a year, which again, is pretty fine. Yet in the last four years, the growth rate slowed to just 5% a year.
The board has indicated that will now slow to just 2% a year. That isn’t a disaster, given the scale of the yield, but I don’t like the direction of travel.
Forecast growth and cover
Here’s something else I don’t like. While the shares are forecast to yield 9.2%, shareholder payouts will be covered just once by earnings. Normally, I’d like to see a figure closer to two. That’s down to three successive years of negative earnings per share growth, with big falls of 62%, 43% and 61%. That’s pretty horrid and has driven the price-to-earnings ratio past the 80 mark.
On the brighter side, the board has pledged to carry out “material” share buybacks as part of its cash return policy. Personally, I prefer dividends, but buybacks have their charms too. The flipside is that they’re entirely discretionary and can be paused at any time.
Management hopes to improve performance by lifting core operating returns and generating value from disposals, but competition is fierce. Legal & General has a strong foothold in the bulk annuity market, yet it’s far from the only insurer chasing growth there. And with more than £1.2trn in assets, it remains exposed to stock market volatility. I expect a fair bit of that.
So how safe is the dividend? I’d say moderately, but only if management delivers on its turnaround plan. If profits falter, the first casualty will be buybacks. But if the pressure persists, that big dividend could be next.
For now, I’ll keep holding. The income remains generous and I’m hoping the shares will bounce at some point. It’s been a long time coming though.
