The Pros And Cons Of Investing In Legal & General plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

UK outlook still carries risks

Although Legal & General is one of the country’s life insurance heavyweights, the effect of wider economic travails in the UK — combined with industry-specific problems — could severely hamper profitability looking into next year and beyond.

Ratings agency Fitch said that profits in the life insurance sector are likely to be squeezed by intensifying price competition and low investment yields, Reuters recently reported. On top of this, a backdrop of insipid growth in people’s wage packets is also likely to weigh on demand for insurance products as disposable income remains under the cosh, the agency said.

Pulling up trees across the globe

Still, Legal & General continues to see new business volumes surge, and the firm’s interims last month revealed a 65% increase in gross inflows during January-September, to £42.1bn. This helped to drive total assets under management during the nine-month period to £433bn, a 2.3% on-year increase.

Promisingly, the life insurance giant is witnessing galloping strength overseas as well as its core markets at home, and saw gross inflows from international customers surge almost 92% in the third quarter to £6.9bn. Solid inflows from the Gulf, US and Europe in particular drove total assets under management from overseas clients 9.6% higher to £57bn.

Dividends trail sector rivals

The prospect of surging business is expected to maintain the firm’s progressive dividend policy this year and next. Indeed, last year’s 7.65p per share dividend is anticipated to rise to 9.2p this year and again to 10.65p in 2014.

These potential payments currently carry yields of 4.3% and 5% for 2013 and 2014 respectively, well above the 3.2% mean for the FTSE 100. Still, these figures trail a forecast average of 4.7% for 2013 for the entire life insurance sector, a figure which is also on course to rise in future years in lockstep with broad earnings growth across the industry.

Earnings expected to ratchet higher

However, Legal & General is a better value pick versus its rivals on the basis of predicted earnings. Current forecasts put earnings per share growth for 2013 and 2014 at 12% and 9% respectively, figures which create P/E ratings of 13.2 and 12.1 for these years. These figures compare nicely with a prospective average of 14 for the life insurance sector.

In my opinion Legal & General’s strength at home, and expanding presence in overseas markets, should provide a solid backbone for future growth not only next year but well into the future. Indeed, I believe that a combination of spectacular organic growth, combined with the likelihood of more successful M&A action amid a surging cash pile, should significantly bolster the firm’s earnings outlook.

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> Royston does not own shares in Legal & General.