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