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As the Legal & General share price crashes, dividend yields reach 10%. I’d buy

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Legal & General (LSE: LGEN) had been doing reasonably well following the Brexit referendum shock of 2016. That vote knocked the whole financial industry for six. But the Legal & General share price was coming back. Until this year.

Since the start of 2020, the shares are down 38%. That’s worse then sector rival Aviva and its 32% fall. And way worse than the overall FTSE 100, which is down 22%. Will L&G shareholders see anything to cheer any time soon? I think they will, and it could come quicker than people expect.

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The thing I like most about the Legal & General share price is that it represents a terrific long-term dividend investment that’s only got better. The annual payments have been progressive. And they’ve provided yields of around the 6% mark in recent years.

Dividends in the financial sector have been tumbling in 2020, as companies seek to preserve capital. But LGEN is having none of that. In August, the company announced an interim dividend of 4.93p per share, “providing flexibility as the economic effect of Covid-19 becomes clearer.”

Dividend commitment

That’s despite a big fall in first-half profit, and for me it shows strong confidence in the firm’s future. The Legal & General share price initially responded positively to the news, but less so than I’d have hoped.

And since a second wave of coronavirus infection has been raising its ugly head, the shares have slid downwards again. Maybe investors have less confidence in the insurer’s ability to maintain its dividends than the board does?

At the interim stage, the firm’s liquidity looked very solid. The report described the balance sheet as robust, and L&G was able to boast a Solvency II coverage ratio of 173% — slightly better than 12 months previously. Total annuity assets were up, and assets under management were up too.

Solid second-half outlook

In its outlook statement, the company said “Despite Covid-19, 2020 is anticipated to be the second largest on record, with £20bn to £25bn of UK [pension risk transfer] expected to transact, demonstrating the resilience of this market.

It added that its investment management arm “is well positioned to continue to drive net flows, and to deliver meaningful earnings growth.” And on that dividend, L&G said it “expects to maintain its progressive dividend policy reflecting the group’s expected underlying business growth, including net release from operations and operating earnings.”

Legal & General share price recovery?

Forecasts suggest only a modest shrinkage in EPS for the full year. That will leave enough to cover the forecast dividend almost 1.6 times. That’s not far below 2019 cover of a bit over 1.7 times, and it looks very reassuring to me in such a traumatic year.

On today’s depressed share price, the dividend would yield 9.5%. And we’re looking at a P/E multiple of just 6.7. I’ve suggested that the Aviva share price could easily double in the next 12 to 24 months. I think the same is likely of the Legal & General share price too.

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Alan Oscroft owns shares of 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.

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