The Motley Fool

Why Legal & General Group Plc Has Great Growth Prospects

_ISA1The recession years were tough on the insurance and finance business, with a couple of the big insurers being forced to slash their dividends. But other than a small decline in 2009, Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) managed to avoid that, and has kept its dividends growing.

Growth in 2012

We did, however, only see a return to earnings growth in 2012, though there is more of the same currently forecast for the year just ended and the next two years. Here’s a summary of how things are looking:

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Dec EPS Change P/E Dividend Change Yield Cover
2012 13.9p +12% 10.5 7.65p +20% 5.3% 1.8x
2013* 15.8p +13% 15.4 9.29p +21% 3.9% 1.7x
2014* 17.1p +9% 14.1 10.65p +15% 4.5% 1.6x
2015* 18.6p +8% 13.0 11.77p +11% 4.9% 1.6x

* forecast

That looks pretty good to me, and the rest of the investment world seems to agree. In fact, the reason that expected price to earnings (P/E) ratio for the year just ended in December 2013 has rising to top 15, and the reason the dividend yield looks set to fall from 5.3% to 3.9% is simple — people have been buying the shares and pushing the price up.

Nice reward

If you bought a year ago, I’ll bet this chart makes you feel good:

A rise of nearly 60% over 12 months, in which the FTSE hasn’t managed 10%, is a great year in anybody’s books — and don’t forget that extra 5.3% from dividends.

It’s all on the back of that return to earnings growth, so what evidence to we have so far to support the forecasts?

Looking good at Q3 time

Well, we have Legal & General’s third-quarter update from November, headlined “Strong Performance Across All Divisions“.

Gross inflows for the quarter rose by 71% to £15.4bn, with inflows for the nine months up 65% to £42.1bn. And that led to an total assets under management figure of £443bn — at the halfway stage it had stood at £433bn. Operational cash generation was looking good too, up 11% to £780m for the year-to-date.

So, earnings growth for 2013 looks to be in the bag, and with people apparently back to saving and investing, earnings growth over the next couple of years is looking promising.

Buy the shares?

On a P/E of 14 for year-end 2014, the shares might look fully-valued right now, but those rising dividends do look attractive — but whether to invest is obviously up to you.

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> Alan does not own any shares in Legal & General.