Legal & General (LSE: LGEN) has been a high-yield star for years, but its shares have dropped 15% since March.
Partly this was due to the failures of Silicon Valley Bank and Credit Suisse that began around that time. This stirred up memories in investors of the Great Financial Crisis that started in 2007.
The financial services provider has also been hit by the UK’s current toxic mix of high inflation and interest rates. This has reduced potential clients’ disposable incomes that might be used for investing in its products.
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The same toxic combination has pushed the benchmark FTSE 100 index lower now than it was five years ago. Legal & General has long been a leader in low-cost index tracker funds.
On 5 July, it announced that its divisional operating profit for 2022 was down 28% under new accounting rules. This was worse than the original guidance of a 20%-25% decline, and the shares fell further on the news.
Fundamentals matter long term
Over and above these short-term negative factors, the company’s core business looks strong to me. Indeed, it also stressed on 5 July that the accountancy changes would have no impact on its five-year growth targets.
From the start of its five-year plan in 2020 to the end of 2022, it achieved £5.1bn of cash generation. It also made £4.9bn in cumulative capital generation. It stated in its 2022 results that even zero growth in both metrics from now to 2024 would allow it to generate £8bn-£9bn in cumulative cash and capital.
Another sign of balance sheet strength was its Solvency II ratio rising to 236% in 2022, from 187% in 2021.
It remains a leader in the UK Pension Risk Transfer (PRT) market, in which companies outsource their pension commitments. And it is in the Top 10 in the US PRT market as well.
Legal & General Investment Management is also a leading global asset manager. It is ranked 11th in the world, with £1.2trn of assets under management.
On 10 July, it added more business — a £1.8bn PRT deal with FTSE 100 water group United Utilities.
Stellar shareholder returns
On top of these positives, Legal & General is still a star dividend stock. Its yield in 2022 was 7.8%, in 2021 it was 6.2%, and in 2020 it was 6.6%. In 2019 and 2018 these payouts were 5.8% and 7.1%, respectively.
Based on analysts’ and company forecasts, the payout for this year should be between 8% and 9%. Next year, it could be even higher, depending on market conditions and the company’s share price.
The chief risk for me in the stock is that inflation and interest rates remain high. This would continue to act as a deterrent to new client business and to weigh on the FTSE 100.
However, I have holdings in the company and am very happy to keep them. If I did not, I would buy it now for the dividends and share price gains. Specifically, I hope to see all the losses from March recouped this year, at minimum.
