Citi has predicted that the price of gold could smash records and hit $2,000 in the next year or two. The current price is around $1,490, after a strong rise in recent months due to the US–China trade war, tensions in the Middle East, and wider concerns for the global economy.
When investors get nervous, it seems they turn to safe havens, which include gold. For investors with a long-term mindset, however, there are almost certainly better alternatives than investing in the fluctuating price of a precious metal.
Better than gold?
Could it really be that insurer and asset management company Legal & General (LSE: LGEN) is a better investment than gold? I think so. If you Google L&G, you’ll see the company is getting involved in lots of different industries, from buying property in Leeds, to providing long-term debt financing for solar energy, to buying out the UK pension scheme of US law firm Edwards Wildman Palmer for around £35m. It’s a lot to get your head around.
The investment case is far simpler. The company has £1trn of assets, from three main business divisions: insurance, investing and annuities, and investment management. The company is well-positioned to capitalise on an ageing population and the need for individuals, governments, and businesses to invest in pensions.
This is a very profitable business model and looks set to continue being so as lifespans increase and pensions are auto-enrolled. From 2014 to 2018 the dividend per share rose from 11.25p to 16.42p. That’s an increase of 46%.
The dividend and strategy
The dividend is one of the major attractions for an investor wanting to buy L&G shares, as it yields an impressive 6.4%. The dividend has also been growing year on year, so clearly the management isn’t concerned about Brexit, lower interest rates, or wider economic concerns, which is a positive sign for investors.
The company is well capitalised, has a robust capital position with a Solvency II surplus of £6.9bn and a coverage ratio of 193%. This may be boring, but it means the investor is well protected from a downswing in the economy. The sale of its general insurance business to Allianz earlier this year, for an initial £242m, helped strengthen that ratio and balance sheet. The sale was part of a strategy to off-load non-core parts of the business.
I think this strategy, of focusing on core areas with long-term growth potential, makes absolute sense. It’s very easy for a company as big as L&G to become unwieldy, which can result in lower returns for investors, as parts of the business struggle or are overlooked by senior management. Running a tighter ship ought to be good for profits and the share price as L&G can continue to have strong market share in its chosen areas of specialisation.
With this in mind, and with the shares trading on a price-to-earnings ratio of less than 9, I think the shares really do look good value and should outperform gold as an investment.
