Stockwatch: should you buy into L&G’s dividend dip?

Being one of the highest-yielding FTSE 100 stocks, analyst Edmond Jackson examines the logic of buying this finance giant following the latest dividend development.

29th April 2025 09:46

Edmond Jackson from interactive investor

As I have previously noted, high-yielding shares sometimes drop by more than is implied when going ex-dividend and rebound more than strictly justified if momentum traders chase any rally. It is all very “market technical” but worth keeping an eye on.

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So, I was interested to see if this affected Legal & General Group (LSE:LGEN), one of the most respected dividend payers. Yet a near 6% fall from 252p to 237p looks about in line with the near 9% yield implied by the 15.36p final dividend payable 5 June (following the 6.0p interim payout). Perhaps it indicates that with greater interest currently in high-yielding UK shares, the market has become more efficient.

Notably, this FTSE 100-listed investment manager and insurer featured in various “popular trades” lists last week, its sensitivity to markets making it quite a proxy to take bull/bear views. That is likely key to medium-term total return from this share, over and above any management action.

You may, however, prefer to take the view that markets are inherently unpredictable, and that an investor’s most reliable policy is to assess the security of a dividend and buy/add whenever the market price offers a perceived discount to fair value. An 11% yield when L&G dropped to 215p in the market chaos a week ago, provided a trigger to buy.

Source: TradingView. Past performance is not a guide to future performance.

There has been similar volatility in comparable businesses such as M&G Ordinary Shares (LSE:MNG) and Phoenix Group Holdings (LSE:PHNX), where the market prices the shares for high yields, with investors wanting capital gains having to get lucky trading what has, for the most part, been volatile sideways trading. While demographics imply retirement savings should be a growth market, it is highly competitive, and asset managers have suffered outflows that are yet to turn demonstrably positive.

L&G recovers to median point of last three years

L&G shares have traded between 208p in October 2023 and a brief high of 283p in August 2022, but are currently trading close to prices seen in 2017. Yet this could be seen as a share price that’s holding up remarkably well, propped up by the high yield, given an uninspiring financial summary since 2016:

Legal & General - financial summary
Year-end 31 Dec

	2016	2017	2018	2019	2020	2021
Operating profit (£m)	1,517	2,061	2,129	2,156	1,499	2,632
Net profit (£m)	1,258	1,891	1,827	1,834	1,607	2,050
Reported EPS (p)	19.6	26.3	29.9	30.4	21.0	32.6
Normalised EPS (p)	19.9	26.3	30.0	31.2	20.0	33.2
Earnings per share growth (%)	9.5	32.2	14.0	4.1	-35.8	65.9
Return on capital (%)	0.3	0.4	0.4	0.4	0.3	0.5
Operating cashflow/share (p)	68.7	74.0	-18.9	-60	68.5	-2.7
Capex/share (p)	0.8	3.9	6.7	1.5	2.6	3.3
Free cashflow/share (p)	67.9	70.1	-25.6	-61.8	65.9	-6.0
Dividend per share (p)	14.4	15.4	16.4	17.6	17.6	23.9
Covered by earnings (x)	1.4	1.7	1.8	1.7	1.2	1.4
Cash (£m)	25,717	18,919	17,321	13,923	18,020	16,487
Net debt (£m)	-22,302	-14,978	-12,393	-8,496	-12,131	-11,045
Net assets (£m)	6,945	7,516	8,580	9,038	9,997	10,981
Net assets/share (p)	117	126	144	152	169	185

Source: historic company REFS and company accounts.

I tilted towards a “buy” stance when last writing about L&G at 227p in June 2024, due not just to the circa 9% yield, but a new CEO effective from that January who targeted earnings per share growth in high single digits with an operating return on equity over 20%.

At 237p currently, the forward price/earnings (PE) multiple is 10.3x based on consensus for normalised earnings per share (EPS) of 23.1p for 2025, and 9.3x consensus for 25.6p in 2026. This assumes a net profit rebound this year near to £1.5 billion then £1.6 billion in 2026. That implies around 10% earnings growth, hence the PE is reasonably in line, if a rather snapshot view.

Given the investment return from financial assets held is such a key variable in these big managers/insurers’ profits, it really is hard to be sure about earnings forecasts, which is another reason why the market defaults to pricing such shares on yield.

The 2024 consolidated income statement shows investment return down 34% to £21.7 billion and change in investment contract liabilities negative at £22.2 billion, making for a £1.9 billion insurance and investment result. Expenses and tax then whittled reported profit down 56% to £195 million.

So, even if some costs are adjusted out or better controlled, and L&G performs well in terms of product sales, macro financial market swings can still dictate the outcome.

The end-2024 balance sheet had £296 billion of financial investments – of which over £200 billion were in equities – constituting over 91% of total assets, dwarfing £10 billion of investment property.

Shareholder returns currently underwritten by disposals

In terms of core operating profit and earnings per share, both rose around 6% and operating return on equity by 8% to near 35%.

Alongside a dividend up 5% to 21.4p – not quite covered by core earnings of 20.2p per share – a £500 million buyback programme was declared, which extends a recent £1 billion scheme using proceeds from the £1.8 billion sale of a US protection insurance business.

Such returns are also being facilitated by last September’s sale of Cala Homes which brought in £500 million cash, with a further £1 billion to be paid over five years on a non-contingent basis.

That should support cash balances even if end-2024 showed a 19% reduction to £16.7 billion, relative to an annual dividend cost likely to be around £1.3 billion. According to a “solvency II” (regime for insurance companies) ratio of 232%, L&G holds over twice stipulated reserves, hence is also supportive for dividends and buybacks, the latter being marginally supportive for capital growth.

I suspect the market will still want to see medium-term improvement in free cash flow, an ultimate benchmark for dividends.

The 2024 cash flow statement showed the outflow from operations at least mitigated from £14.2 billion to £4.5 billion, chiefly due to (reducing) losses on financial investments albeit a 16% further reduction in investment income. This is complex to interpret, however, with cash generation as defined by solvency II eased 4% to near £1.8 billion.

Dividend growth of around 2% in each of the next two years looks about as guaranteed as you are close to getting in the stock markets, so there is at least plenty of time for management to work towards a better cash flow profile. Variability in financial returns from investing, also insurance and investment contracts, mean it is likely to stay overall volatile.

Operational narrative reads broadly well

Institutional retirement and retail (workplace pensions and individual annuities) saw 2024 operating profit up 7.5% and 12% respectively last year, to constitute 80% of group total, although asset management saw a 10.5% fall. Flows into higher asset management products were said to be continuing but, as with most asset managers, it seems a struggle to regain positive net inflows.

Asset-backing is not as strong as financial shares such as Barclays (LSE:BARC), which at around 290p trades below 0.8x tangible net assets and 0.6x net assets. L&G trades at just over 4x net assets and nearly 5x on a tangible basis. Comparably, M&G at 202p is on 1.5x net assets and 3x tangible.

L&G’s debt profile is modest: a total £7.7 billion incurring £365 million interest greatly outweighed by £16.7 billion cash.

But in terms of downside risk protection, the dividend looks sufficiently cast iron – proving itself in the Trump tariffs’ sell-off – to justifiably rely on.

So much depends on wider investment outlook

A dilemma with the likes of L&G is quantifying upside potential, the “reward” side of the value equation. I question if this positive narrative can outweigh the scope for variability from investment returns. With this kind of share you are significantly hostage to markets albeit well-rewarded by a quality yield for the holding risk.

Possibly I over-relied on the “new CEO” theme nearly a year ago, when truly the art of investing in L&G is exploiting market panics, the yield making this share into a coiled spring.

On that basis, a “hold” stance is logical until Trump’s next major tantrum, although I do not imply a downgrade, just better awareness of the dynamics behind extracting total return from L&G.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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