The Motley Fool

Why Legal & General Group Plc Should Be A Candidate For Your 2014 ISA

_ISA2The insurance sector has had a few tough years of recession, but when it comes to investing in an ISA for the long term, such cyclical trifles tend to turn out as mere ripples in a long upward trend.

A 50% rise!

But with its share price up more then 50% over the past 12 months already, to 238p, is Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) a good choice for some of the new £11,760 allowance coming in April? Or, indeed, for anything unused from this year?

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Let’s take a look at the firm’s track record first:

Dec EPS Change P/E Dividend Change Yield Cover
2008 -17.88p n/a n/a 4.06p 5.3%  n/a
2009 14.82p n/a 5.4 3.84p -4.0% 4.8%  3.9x
2010 14.07p -5% 6.9 4.75p +24% 4.9%  3.0x
2011 12.42p -12% 8.3 6.40p +35% 6.2% 1.9x
2012 13.90p +12% 10.5 7.65p +20% 5.3% 1.8x
2013* 15.79p +14% 15.2 9.24p +21% 3.9% 1.7x
2014* 17.11p +8% 14.0 10.57p +14% 4.4% 1.6x
2015* 18.55p +8% 13.0 11.77p +11% 4.9% 1.6x

* forecast

So a rocky few years, but even though the share price has been rising since Legal & General’s earnings recovery started in 2012, it’s still on a reasonable price to earnings ratio (P/E) of 14-15 — the FTSE forward average stands at about 17 right now.

2013 results soon

Full-year results for 2013 should be with us on 5 March, and things sounded pretty positive at the half-way stage — with double-digit rises in operational cash generation and pre-tax profit. And there was a 22% rise in the interim dividend, setting the scene nicely for the expected full-year rise.

Dividends are the key for a successful long-term investment in the insurance sector, and Legal & General’s have been way outstripping inflation over the past few years. But we do need to sound a note of caution here, too — dividend rises that are ahead of earnings growth will stretch the cover, and we really don’t want to see Legal & General having to slash its dividend the way some others did when they overstretched things.

Leveling off

I can’t see dividend cover coming down much below that 1.6 times, so dividend growth is pretty certain to slow over the next few years — but if it just keeps pace with earnings, it will keep on filling up those ISAs very nicely.

I also don’t see the share price repeating its recent rapid rise in the near future. But if we should get 5% per year over the next 20 years and, say, an average dividend yield of 4.5%, we’d see a £1,000 ISA investment in Legal & General turning into more than £6,000 — and that’s more than four times what you’d get in a cash ISA at today’s interest rates.

So yes, I think you’d do well to consider Legal & General for a slice of that ISA cash — though I bet you wish you stashed some in 2009’s ISA when the P/E was down around five!

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