Legal & General Group Plc’s 2 Greatest Strengths

Two standout factors supporting an investment in Legal & General Group plc (LON: LGEN)

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When I think of life insurance and financial services company Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1) Rising dividend

There’s no doubt that Legal & General is making good progress with its dividend. The recent full-year payout is up 22% on the year before and that rise continues a strong trend:

Year to December 2009 2010 2011 2012 2013
Adjusted earnings per share 14.82p 14.07p 12.42p 13.9p 15.2p
Dividend per share 3.84p 4.75p 6.4p 7.65p 9.3p
Dividend cover from earnings 3.86 2.96 1.94 1.82 1.63

However, the directors are pushing dividend rises ahead of earnings’ growth, and cover for the dividend from earnings is falling. There’s more of that to come with plans to move net cash cover from the current 1.8 times to 1.5 times over the next two years.

Does falling dividend cover matter? It doesn’t affect the cash that Legal & General investors receive, of course, but it does make the payout vulnerable to any downturn in the underlying business. Should profits and cash flow slip, the dividend will likely be an early target for a cut. The chances of that happening in the future are high, as Legal & General’s business as a financial operator makes it highly geared to macro-economic and financial market cycles.

The forward dividend yield is running at about 5.6% for 2015, which seems attractive at first glance but, given the big cyclical element to the business, dividend-hunting investors could face a bumpy ride in terms of both capital and income fluctuation over the coming years.

2) Product diversity

Legal & General’s diversified product-offering backs up that dividend payout. It’s encouraging to see that the firm doesn’t rely on just a single line of business. In 2013, 33% of the firm’s operating profit came from UK insurance, 23% from retirement products, 23% from investment management, 13% from investing its own capital and 7% from the company’s American operations.

The directors see opportunities ahead and cite growth drivers as ageing populations, globalisation of asset markets, welfare reform, digital lifestyles, and retrenching banks. If Legal & General can successfully market its products to service this anticipated extra demand, there’s a good chance that earnings growth will continue. City analysts following the firm expect earnings to increase by around 9% during 2014 and 8% in 2015.

What now?

That forward dividend yield of 5.6% looks attractive, but I’m mindful of the cyclicality inherent in the financial services industry, which could hold back the Legal & General’s share-price progress.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin does not hold shares in Legal & General Group.

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