Momentum is a feature of investing that is easy to overlook. However, it can stimulate a company’s valuation to a level well above its long term average and also in excess of that placed on the wider market.
Similarly, momentum against an investor can cause share prices to be depressed for a considerable length of time and be significantly below those of the wider market.
So, momentum can be a friend or a foe.
In the case of Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US), the last six months have seen a significant amount of ‘friendly’ momentum. Indeed, its shares have risen from 190p to the current price of 230p, with the share price chart showing a relatively steady upward movement — especially in recent months.
In fact, while the FTSE 100 has delivered returns of less than 3% over the last six months, Legal & General has been able to make gains of over 20% – helped in significant part by the improving sentiment and positive momentum surrounding the stock.
This momentum seems to have the potential to continue, since the company’s forecasts highlight an above-average dividend growth rate, which could prove important in an era of rising interest rates.
Indeed, Legal & General’s dividend per share is forecast to increase by over 13% in each of the next two years. This could be crucial to the company maintaining its momentum because, with a yield topping 4% at present, Legal & General could have seen inflows from investors looking to exit large, defensive stocks such as Diageo and British American Tobacco, which have underperformed the wider index over the last 6 months.
Therefore, for momentum to remain positive in the stock, it could be the case that dividends per share will need to grow at a brisk pace — certainly in excess of the market average of around 3% and in excess of the inflation rate, too.
With growth in dividends per share of over 13% per annum forecast for the next two years, this seems to be very much the case. Such growth forecasts may not allow you to retire in 2014, but could mean that the date of your retirement is brought that little bit closer.
Peter does not own shares in Legal & General.