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Why I’d buy FTSE 100 star Legal & General Group plc as profits set to hit record high

Shareholders of insurance and investment manager Legal & General Group (LSE: LGEN) have doubled their money over the last five years, when dividends are included.

That compares very well to the 23% return (plus dividends) provided by the FTSE 100 over the same period. I’m not surprised that fund manager Neil Woodford has made the stock a top three holding in both of his income funds.

Strong progress in all areas

According to chief executive Nigel Wilson, the firm is on course to deliver “a record year for earnings and profits”.

Legal & General’s retirement business has increased its market share over the last year and has a substantial pipeline of new work. The group’s investment management arm had seen net inflows of £38.1bn by the end of October, while the growth Capital business had generated £256m of gross proceeds from £821m of transactions.

Is it too late to buy?

After delivering average earnings growth of 11.5% per year since 2011, you might expect Legal & General shares to be priced for success. But the group still has a relatively modest valuation, in my view.

Today’s trading statement appeared to confirm broker forecasts for record profits in 2017. According to the data service I use, the group is expected to report an adjusted net profit of £1,491m and earnings of 25.2p per share this year.

That leaves the stock on a forecast P/E of 10.5, with a prospective yield of 5.8%. The firm’s dividend has been covered robustly by earnings and cash generation in recent years, and I’d expect this to continue this year.

I think these shares continue to rate as a long-term income buy.

A stock I’d buy and forget

The largest holding in both of Neil Woodford’s income funds is FTSE 100 pharmaceutical giant AstraZeneca (LSE: AZN).

The stock market performance of this Anglo-Swedish group has been volatile over the last couple of years, thanks to a wave of patent expiries, an unsuccessful takeover bid, and a major drug trial disappointment.

However, this is a long-term business. I believe the group’s fortunes are now starting to turn. Indeed, my feeling is that a new uptrend may have been established for the shares, which have now gained 5% this year.

AstraZeneca’s financial results certainly seem to be improving. Operating profit for the first nine months of the year rose to $2,991m. That’s an increase of 16% from last year, excluding exchange rate gains.

Patent expiries have caused the prices of several major products to fall. But this impact is starting to fade away. The group’s sales fell by 4% during the first nine months of the year, but rose by 9% during the third quarter.

Analysts’ expect the group to report adjusted earnings of $3.79 per share this year, providing solid cover for the expected dividend of $2.73 per share.

These figures give the stock a forecast P/E of 16.7 and a prospective yield of 4.3%. In my opinion, this could be a good entry point for long-term income investors.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.