In times gone by, an incoming chief executive’s first set of annual results, only nine weeks after taking over, would have been an irresistible opportunity to throw the proverbial kitchen sink into what basically are their predecessor’s farewell numbers, saving the goodies for later.
Instead, António Simões presented a dull set of numbers at Legal & General that at several points in his statement he buffed up as “resilient”. Operating profits were virtually unchanged at £1.66 billion and after-tax profits were down from £782 million to £457 million.
Nevertheless, Simões is drawing a clear line between himself and his predecessor, the divisive Sir Nigel Wilson, by holding back his strategic vision for a capital markets day in June. Hints so far suggest that this might be when the kitchen sink sails through the window.
Simões has plenty to get his teeth into. Life insurers used to be known as investment operations with an insurance business tacked on, but L&G took that to another level under Wilson, adding housebuilding and venture capital into its investment mix. In 2023, an otherwise flat-to-floppy year, the L&G Capital toy box made a very welcome third of the group’s operating profit from only 1.7 per cent of total assets.
But it’s volatile: few insurance groups have had to write off an electric car subscription service, while housebuilding, as well as being perennially near the top of the political agenda, is notoriously cyclical. So Simões, with his banking background, can be expected to take a pursed-lips look at these non-insurance activities. Why take up management time organising the building of houses when you can simply buy shares in Persimmon or Crest Nicholson?
L&G Capital is one of four divisions. The others are Retirement Institutional, which concentrates on defined-benefit pensions in Britain, America, Canada and the Netherlands; Retail, handling £25.4 billion of workplace savings; and Investment Management, investing £465.4 billion in global stock markets.
Retirement Institutional was the star performer, making big money from the booming pension risk transfer market, whereby the likes of L&G take on pension schemes from employers. It has just relieved Boots, the high street retailer, and British Steel from running their pension schemes and hopes to write £8 billion to £10 billion a year of similar deals in the UK alone.
However, the overwhelming majority of these schemes are defined-benefit, where the provider has to match a proportion of pensioners’ exit salary. These are declining in favour of defined-contribution arrangements. Last year, Retail was hit by rising interest rates and individuals’ reluctance to commit to regular savings plans when household budgets were squeezed.
The key weather vane for L&G’s prospects is its capital position under the European Union’s Solvency II Directive, the ratio of an insurance company’s eligible capital to its regulatory capital requirement to which the British insurance industry still adheres. It came into force eight years ago to protect consumers and post-Brexit is administered in this country by the Prudential Regulation Authority. L&G’s ratio fell last year from 236 per cent to a still very healthy 224 per cent, or more than twice the minimum requirement, to produce a £9.2 billion surplus. That gives it plenty of scope to grow on all fronts, not least the dividend.
The shares are a complex play on interest rates, stock markets, the economy and housing, not forgetting the group’s core businesses of pensions and investment. With the exception of a brief upward flip at the start of 2022, the shares have stayed within a 200p to 300p range since November 2020, despite the dividend increasing steadily. The shares defied this column’s expectations a year ago, when we recommended buying at 263p. They sank to 206p in October before recovering to their present 244p.
A new chief executive and a rosier interest rate environment should help to launch a determined assault on their 313p pre-Covid peak. And if that doesn’t come off, shareholders should be able to bask in a continually rising dividend, perhaps taking the yield to a heady 9.5 per cent at the present share price in respect of 2025.
Advice Buy
Why? First-class income stock, with improving economic environment
Ricardo
Ricardo, a global strategic, environmental and engineering consultancy in the transport, energy and climate sectors, is one of those little-known companies that bring bright ideas from drawing board to daylight.
Financially, however, it’s something of a mess. This week’s interim report was notable for highlights emphasising a record order book, strong growth in some divisions and “excellent” cash conversion. Yet the only mention of profit in the six months to the end of December was that delayed customer orders had affected the outcome and that the profit margin should improve in the present half-year.
Sure enough, while revenue from continuing operations were 5.4 per cent ahead at £224.2 million, underlying operating profit was £500,000 light at £12 million. The real tell was in earnings per share: basic underlying on this measure were down by 24.5 per cent, from £12.2 million to £9.2 million, and basic reported earnings per share were negative, albeit improving from a £13.2 million loss to a £5.5 million loss.
The difference between underlying and reported is explained by “amortisation and impairment of acquired intangible assets and goodwill, acquisition-related expenditure, costs related to implementation and configuration of purchased software services, restructuring costs and other non-recurring items”. A huge red flag.
These manoeuvres may be the growing pains of a fast-moving business, but they also can signal that the company is not entirely in control of its fate. When a business logs non-recurring items year after year, there is a case for arguing they are not really non-recurring but a feature.
Graham Ritchie, the chief executive, is a chartered accountant who came to Ricardo in 2021 from Intertek, which this column discussed yesterday. He has shown his mettle by installing fresh leadership at the problem child, the automotive and industrial segment, which suffered the delayed orders, but needs to get a move on with other remedies.
The shares have never recovered since Covid, despite a talented and skilled workforce that, with patience, should prove its worth. A 12.4 price-to-earnings ratio and 2.8 per cent annual dividend yield are reasonable value.
Advice Buy
Why? A share to tuck away for when the sun shines
