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Why I’d buy this share with its 6% dividend yield

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Investing in high-yielding shares is a strategy some investors use, especially if they want income. I have identified what I believe is one of the best such income shares on the FTSE 100. 

Legal & General (LSE: LGEN) comprises five businesses. There’s pension risk transfer, investment management, capital investment, insurance and retirement solutions. Growth versus in the first half versus last year has been strongest at the pension risk transfer business, where operating profit increased by 45%, and with 30% market share in the UK, the group is well-positioned here. Meanwhile, in the US, it has a lot of opportunities to consolidate and grow, as it has a 3% market share. 

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Legal & General has been led by CEO Nigel Wilson since 2012 and he was previously CFO. The chairman is Sir John Kingman, the former Treasury mandarin who led the review into the Financial Reporting Council (FRC). He was appointed in October 2017 and is being lined up to become the non-executive chairman of Tesco Bank. I think it’s good to see that the CFO (although not in the role that long as he was appointed in March 2017) is an actuary by training and has significant insurance experience.

Seven non-executive directors, six of whom have been on the board for five years or less should bring greater accountability and experience to the management of the group which ought to serve shareholders well.

The numbers

Legal & General has a yield of 6% and a P/E of 9. When thinking about the dividend, the cover of 1.5x is not great, but from a high-yielding, mature FTSE 100 company, it’s not unusually low. There’s no indication a dividend cut is coming.

The business is moving increasingly from insurance into asset management, where it has considerable scale. Along with the high yield, I like the actions management is taking to grow, and I think over the next five years it should really benefit shareholders. 

A higher-yielding rival

Aviva (LSE: AV) has an even higher dividend yield, at around 7.1%, and its P/E  points to the shares being cheap as it’s only 11. But is it as good as L&G? The problem I think with Aviva is it seems to be moving much more slowly than its peer. It even appointed a new CEO for this reason, although since Maurice Tulloch started in March 2019, the share price has fallen slightly.

The company has also just promoted a new CFO, Jason Windsor. It’s unclear at this stage what changes at the top mean for the strategy, so until there’s further clarification on that, I’d expect the share price to remain subdued.

One option being considered is the future of the Asia business – which had seen first-half operating profit rise just 1%. Given the expansion of the middle classes in Asian countries and the success of Prudential in that region, this strikes me as an underperformance, which may be why that bit of the business is on the chopping block.

Aviva is also cutting jobs and therefore costs. In June, it announced plans to cut around 1,800 jobs to help reduce expenses by £300m a year over the next three years. Whether this goes far enough to make it more profitable is up for debate. More focus on growth initiatives is needed, I think, although in the short term, reduced costs and increased profitability ought to be good for shareholders. 

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Andy Ross owns shares in Legal & General. The Motley Fool UK has recommended Prudential. 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.

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