Investors in Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) have had a fantastic five years! Not only have shares outperformed the FTSE 100, they have risen five-fold since the current bull market began in March 2009. That’s well ahead of the FTSE 100’s not inconsiderable return of 73% over the same time period. However, is Legal & General now overpriced as an income play? Or is it still a super income stock?
A Top Yield
Despite the vast share price rise in recent years, Legal & General remains a great-yielding stock. Its yield is currently 4.4%, which is well above that of the FTSE 100 at 3.5% and considerably higher than inflation and a typical high-street savings account. However, the yield could go even higher, since Legal & General is relatively conservative when it comes to paying dividends to shareholders.
For example, the company’s dividend payout ratio in 2013 was just 61%, meaning 39% of profits were retained within the business to stimulate future growth. However, since Legal & General is a mature company operating in a mature industry, it could afford to be more generous and pay a greater proportion of earnings out as a dividend to shareholders. Indeed, a level between two-thirds and three-quarters of profit could be sensible and still leave sufficient capital to keep in the business for future growth. Doing so would mean a higher income for shareholders of the company.
Of course, that’s not to say that dividends are not going to grow much in future. Quite the contrary, in fact, since dividends per share are forecast to increase at an annualised rate of 13.6% over the next two years. This is well-ahead of the FTSE 100 average and means that Legal & General could be yielding as much as 5.6% in 2015 (assuming the share price stays where it is).
Trading on a price to earnings (P/E) ratio of 14, Legal & General seems to be fairly attractive considering the yield it offers. While the FTSE 100 has a lower P/E of 13.5, Legal & General is expected to deliver a brisk pace of dividend per share growth, with the scope for even more if the payout ratio is increased. As such, it still looks to be a great income play and a super income stock.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
Peter does not own shares in Legal & General.