Based on amounts paid over the past 12 months, Legal & General (LSE:LGEN), the FTSE 100 pensions, savings and insurance stock, is currently (8 December) yielding 8.6%. This means it has the most generous dividend on the index.
But can such an impressive payout be maintained? Let’s take a look.
A progressive dividend
If history’s a good guide, the signs are encouraging. The group’s been steadily increasing its dividend over the past 10 years. For 2024, its annual payout was 59% higher (in cash terms) than in 2015.
And over this period, it’s consistently offered a yield comfortably in excess of the average for the FTSE 100. At the end of 2019, when its share price was just over 300p (20% higher than it is today), it was yielding 5.8%.
Since then, it’s climbed higher still. Although some of this improvement can be attributed to an increase in its dividend, most can be put down to a falling share price, which appears to coincide with a decline in performance.
| Financial year | Dividend (pence) | Share price | Yield (%) |
|---|---|---|---|
| 2015 | 13.40 | 268 | 5.0 |
| 2016 | 14.35 | 248 | 5.8 |
| 2017 | 15.35 | 273 | 5.6 |
| 2018 | 16.42 | 231 | 7.1 |
| 2019 | 17.57 | 303 | 5.8 |
| 2020 | 17.57 | 266 | 6.6 |
| 2021 | 18.45 | 298 | 6.2 |
| 2022 | 19.37 | 250 | 7.8 |
| 2023 | 20.34 | 251 | 8.1 |
| 2024 | 21.36 | 230 | 9.3 |
| 2025 | 21.79 (forecast) | 249 (current) | 8.8 (forecast) |
| 2026 | 22.23 (forecast) | 249 (current) | 8.9 (forecast) |
| 2027 | 22.67 (forecast) | 249 (current) | 9.1 (forecast) |
Then and now
In 2019, the group reported an operating profit of £2.3bn and earnings per share of 30.9p. In 2024, these figures were £1.7bn and 20.2p (both on an adjusted basis) respectively. However, from a balance sheet perspective, its Solvency II ratio – a measure of financial strength — has increased from 184% at the end of 2019 to 223% at 31 December 2024.
However, new accounting standards introduced in 2023 mean the group’s accounts can be difficult to interpret. But there’s one advantage. Legal and General’s now required to disclose an estimate of the future earnings from its insurance and pension contracts. To calculate this, it relies on discounted cash flow techniques, which are often employed by analysts when valuing companies. At 30 June, its store of future profit was £13.1bn.
But this excludes any contribution from its asset management business, which accounted for 23% of adjusted operating profit in 2024. For simplicity, let’s increase the estimate of future earnings by a quarter to cover this division. This gives us a revised store of profit of £16.4bn, which is around 15% higher than the group’s market-cap.
This is important because it implies the stock isn’t a value trap. It also suggests anyone investing now could avail of both a generous dividend and some capital growth.
Pros and cons
But investors appear unconvinced. Since December 2024, the share price has bounced between 206p and 266p. Even at the top end of this range, it remains below the level achieved in the early 2020s.
This could reflect concerns about increased competition in the industry. Alternatively, some might fear that the current global economic uncertainty could affect the group’s balance sheet and reduce the investment income it receives. In turn, this could reduce its earnings and dividend.
However, the group last cut its payout during the global financial crisis. And it’s pledged to increase it by 2% a year from 2025-2027. This implies a forward (2027) dividend yield of 9.1%.
In my opinion, future increases (no guarantees, of course) are likely to be secured by its pensions division securing new schemes to manage. And anticipated increases in the State Pension age could encourage more people to enter into private schemes.
On balance, I think Legal & General’s a stock deserving consideration.
