Reading the news nowadays is scary. The Covid-19 recession and US-China tensions are big risks to investors. Buying shares is scary too. However, there’s one FTSE 100 bargain I like. This is Legal & General (LSE: LGEN).
As you know, the company is a large financial institution. It provides investment and insurance services. But now is a tough time for cyclicals, including financials. Low interest rates, low insurance costs and investors’ panic all add up to uncertainty around Legal & General. As a result, the company’s shares trade at levels unseen since 2016. Let’s look at the fundamentals to see whether the low share price is justified.
FTSE 100 company’s fundamentals
| P/E ratio | Dividend yield | ROE | Moody’s credit rating | S&P credit rating | Book value per share | P/B |
| 7.05 | 8.7% | 20.4% | A2 | A | 156 p | 1.29 |
Source: Legal & General
I think there are plenty of things that make the company look like a great investment opportunity and a steal at the current share price. Needless to say, the price-to-earnings ratio of about 7 makes it look like a bargain. Legal & General seems to be a highly efficient business as its ROE ratio (return-on-equity) is above 20%. Generally, an ROE of 15%-20% is considered to be good.
The dividend yield of 8.7% (over and above the FTSE 100’s average of about 4%) looks great. But what I particularly like about the dividend is the fact that it seems to be sustainable. Despite pressure from the Bank of England and the stream of UK banks cancelling dividends, Legal & General still decided to pay one this year.
The company also seems to be financially sound. Both S&P and Moody’s left its credit ratings unchanged, in spite of recession fears. They’re still high investment grade. This is mostly due to Legal & General’s size and scale of operations. It’s one of the largest companies in Europe with £1trn in assets under management and a market cap of around £12bn.
The price-to-book ratio of 1.29 is not particularly high as it’s below the FTSE 100’s average of 1.39. But at the same time, it doesn’t make the company look like a value trap from this point of view.
Profits and dividends history
| Year | 2019 | 2018 | 2017 | 2016 |
| EPS | 28.66 p | 24.74 p | 23.10 p | 21.22 p |
| Dividend per share | 17.57 p | 16.42 p | 15.35 p | 14.35 p |
Source: Legal & General
Overall, the picture looks quite inspiring. Rising earnings per share and ever-increasing dividends are what a defensive income investor should aim for. OK, there’s no dramatic growth. But instead, there’s steady growth, which seems to guarantee some stability.
Also good is the fact that Legal & General’s CEO Nigel Wilson owns 2,997,796 of his company’s shares. They’re now worth about £6m. This, in my view, is a great motivator for the CEO to work for the benefit of the shareholders.
There’s one thing, however, that makes me cautious. I compared the company’s income statement to the cash flow statement. Even though EPS seem to be rising beautifully, the net cash flows from operating activities aren’t growing the way earnings are. In fact, the figure was negative in 2019, totalling -£3,285m as opposed to -£361m in 2018. This doesn’t look quite logical to me.
Conclusion
Even though questions remain here, I still consider the company to be a good opportunity overall, and suitable for dividend-seeking investors. As it looks undervalued, I think it’s likely to beat the wider FTSE 100.
