Dividend cuts by UK companies have exceeded £30bn due to the coronavirus pandemic. This has deprived income investors of a key source of wealth. Nevertheless, there are still options for those looking for dividends. My personal favourite income stock is the insurance company Legal & General (LSE: LGEN).
A consistent income stock
The main attraction of Legal & General is its dividend. It currently yields around 8%, and this has seen consistent growth over the past 10 years. But while such high yields can sometimes cause concern, this dividend seems very sustainable. Firstly, it has dividend cover of around 1.8. This means that only around half of the company’s profits are being used to pay shareholders. As a result, borrowing money to pay the dividend isn’t necessary, and profits can be reinvested in the company. This is a very positive sign for any income stock.
Furthermore, Legal & General seems very committed to its dividend. The insurer stuck with its final dividend despite regulatory pressure from the PRA (Prudential Regulation Authority). Its decision differs from other insurance companies like Aviva, which suspended its dividend due to the pandemic. This also indicates that it is in a strong position to pay its dividend. And it demonstrates the commitment to and focus on shareholders by management.
A market leader
Of course, the dividend is nothing without a powerful business to back it up. Not only does Legal & General pay a large dividend, but it is also one of the largest asset managers in Europe. At the moment, assets under management total over £1trn, and this continues to grow. It is also the UK’s leader in bulk annuities, life insurance and other retirement products. Profits from these sectors have been driven by our ageing society, and this should continue to provide growth over the years ahead. The income stock also has a robust capital position with a Solvency II surplus of £6.9bn and a coverage ratio of 174%. This means that there should be no risk of insolvency.
While the share price has basically moved sideways over the past few years, the income stock has seen significant growth recently. In fact, 2019 numbers were better than expected and operating profits rose by 12% to £2.1bn. Legal & General has also taken the shrewd move of issuing debt at current low interest rates. This should help the firm take advantage of new business opportunities, one of which includes further growth outside of Europe.
All in all, I would buy this income stock. While the pandemic will have lessened its profits this year, it has also resulted in a 30% year-to-date share price fall. As a result, for a company that is both sticking to its strong and healthy dividend, and has future growth prospects, I believe LGEN’s low price is a good buying opportunity.
Stuart Blair owns shares in Legal & General and Aviva. The Motley Fool UK has no position in any of the shares mentioned. 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.