The Surprising Buy Case for Legal & General Group plc

Today I am looking at how Legal & General Group’s (LSE: LGEN) (NASDAQOTH: LGGNY.US) hefty cash pile should help to drive earnings through the roof in coming years.

Group ready to splash the cash

Legal & General is an enviable cash generator, facilitated by booming business inflows in recent times. The firm noted in November’s update that net cash generation leapt 20% during the January-September period to £740m, a situation also helped by improved underwriting across all of its major divisions.

The insurer’s burgeoning wallet has allowed it to go on a spending spree over the past year, snapping up the likes of digital investment platform Cofunds, house builder CALA and annuity firm Lucida. And rumour has it that the Co-operative Group’s investment business is now on the radar, Legal & General having reportedly recruited Goldman Sachs to advise on a potential deal.

The company is also putting its cash reserves to good use by investing heavily in major infrastructure projects. Legal & General vowed last month to plough £89m into the construction of a new hospital in Liverpool, as well as purchasing a string of care homes from Prestbury Investments for £70m. New EU rules on capital reserves for insurers, known as Solvency II, give the firm the safeguards needed to keep investments at home ticking higher.

City analysts expect Legal & General to follow up a predicted 13% rise in earnings per share in 2013, to 15.7p per share, with growth of 8% in both 2014 and 2015 to 17p and 18.4p respectively. These projections leave the firm dealing on P/E multiples of 13.3 and 12.3 for this year and next, comfortably below a forward average of 14.8 for the complete life insurance sector.

With growing activity both in the UK and overseas helping new business volumes to surge — gross inflows at Legal & General Investment Management rose 65% alone to £42.1bn in January-September — I expect the firm’s cash mountain to continue to climb, in turn underpinning future growth rates.

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In addition to its bubbly earnings prospects, Legal & General is also a firm favourite for those seeking above-average dividend yields. The company’s progressive payout policy is anticipated to chuck out payments of 10.7p and 11.9p per share in 2014 and 2015 respectively, up from an expected 9.3p for last year. Such payments would create sizeable yields of 4.8% and 5.4%.

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> Royston does not own shares in Legal & General Group.