CORRECTION: The original version of this article incorrectly stated that “market appetite has fallen sharply since Tuesday”. This has now been rectified to reflect the drop in share price due to the stock going ex-dividend
The Legal & General (LSE: LGEN) share price has stepped back sharply in recent hours. Buoyant risk appetite helped lift the FTSE 100 share to 14-month peaks near 300p just six days ago. But market appetite has eroded since Tuesday and the financial giant going ex-dividend today means that it is now trading closer to 275p.
Can we expect the Legal & General share price to bounce back immediately? And should I buy this UK share for my Stocks and Shares ISA today?
The bearish take
There are several reasons why the Legal & General share price could continue to fall. These include:
#1: Dividend expectations souring. The FTSE 100 insurer is a favourite amongst income investors thanks to its historically-huge dividend yields. It’s an attraction that continues to pull UK share pickers in too. For 2021 and 2022 Legal & General’s yields sit at 6.4% and 6.7% respectively. However, in November the business trimmed down its dividend ambitions and pledged to grow shareholder payouts “at low to mid-single digits” from 2021. Steps to build cash at the expense of dividends might be good for payout sustainability. But it could be a big turn-off for its investors and pull the share price lower should dividend hunters begin to exit.
#2: A faltering economic recovery. The biggest threat to the Legal & General share price today, though, is a third wave of Covid-19 infections in parts of the globe. This threatens the global economic rebound and with it profits at this cyclical share. What’s more, a patchy recovery would add extra pressure to the financial services firm as central banks might be tempted to keep interest rates locked low for longer. A combination of these items drove Legal & General’s pre-tax profit 12% lower in 2020.
Why I like Legal & General’s share price
Those issues aside, I think there’s a lot to like about the insurer. The decision to alter its dividend policy might hamper Legal & General share price growth in the short-to-medium term. But as a potential investor, I don’t think its decision to use cash to invest for future growth is a bad idea. Besides, it’s not as if dividend yields at the FTSE 100 firm are likely to fall off a cliff. And they’re still likely to outstrip the broader forward average for UK shares by quite a margin. This currently sits around 3.5%.
I also think the outlook for many of Legal & General’s businesses is pretty exciting. A steadily-expanding and ageing population, for example, means that demand for its retirement planning and life insurance operations should keep growing. The impact of low interest rates on saver returns means that trading at its investment management unit should remain robust too.
City analysts think that Legal & General’s annual earnings will rise 38% in 2021. It’s a prediction that leads to the FTSE 100 company trading on a low forward price-to-earnings (P/E) ratio of 11 times at current prices. This low multiple, allied with those 6%+ dividend yields, make Legal & General highly attractive in my opinion. I’d happily buy this UK share in my ISA today.
Royston Wild has no position in any of the shares mentioned. 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.