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It Might Be Time To Back Away From Legal & General Group Plc

Traditionally, Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) has been thought of as a solid, long-term ‘buy and forget’ investment due to the company’s dominance within the pension market, itself a long-term market.

However, now things are changing and after the government’s recent shake-up of the pensions industry, it could be time to jump ship. 

Rising pressure

Indeed, without a doubt, the largest threat currently facing Legal & General are the government’s recent changes to the UK pension framework.

Pound CoinsYou see, annuities have been a lucrative source of income for pension managers like Legal & General for years, as the company’s savings customers have automatically brought annuities from the company when they retire. Legal & General’s profit margin on annuities has historically been in the region of 8.4%

However, now the government has changed the rules governing pensions, it is likely that Legal & General’s annuity sales will slump, as pensioners withdraw the whole of their pension pot in one go, removing much of the need for annuities.

Unfortunately, Legal & General is also facing pressure within its other key line of business, fund management. In particular, the low-cost fund war is heating up and Legal & General recently launching a UK 100 index trust charging just 0.06%, fund management has historically be a lucrative area for Legal & General. 

Valuation troubling

So, after taking into account the fundamental changes taking place within the annuities and fund management markets, I feel that Legal & General’s current valuation is too high.

Specifically, the company currently trades at a historic P/E of 14, while the wider FTSE 100 as a whole trades at a historic P/E of only 13. In addition, the company’s current valuation means that the company is trading at a multiple nearly double its 10-yr average, a valuation not seen since the dot.com bubble at the turn of the century.

But that’s not all. Indeed, as a fund manager, Legal & General’s fortunes can be drastically affected by sentiment within the global financial markets. If sentiment turns negative then Legal & General could be affected with fund outflows and falling levels of new business.  

Seeking new growth channels

Still, Legal & General’s management has been proactive seeking new channels for growth. For example, the company is planning to launch a lending program to SME’s, following peer Prudential, which has already invested £2bn helping to finance companies like Caffe Nero.

Further, Legal & General is trying to expand its presence around the world, to reduce its dependence upon the UK market. The company recently acquired Global Index Advisors, an Atlanta based investment advisor. 

Summary

All in all, with competition rising within the fund management market and changes taking place within the pensions market, Legal & General is no longer the defensive stalwart it once was. What’s more, the company’s current valuation is troubling, so maybe it’s time to break up with Legal & General.

Legal & General is known for its robust dividend yield, which used to be as high at 6%. However, as the pension market changes, Legal and General's dividend payout could come under pressure. With this in mind it could be time to look for other income opportunities.

To help you analyze potential candidates, The Motley Fool's analysts have put together this free report, which outlines all the key points you need to consider when selecting dividend stocks for your portfolio.

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Rupert does not own any share mentioned within this article.