It's been a solid performer over the years and still offers one of the most generous dividends around. Our head of markets runs through these annual results.
Legal & General Group (LSE:LGEN) continues to benefit from its undoubted capital strength and the virtuous circle which its four operating units create, all in growing markets, leading to an impressive showing for the year.
The structure of the group allows the generation of assets through its bulk annuity, or Pension Risk Transfers (PRT) business, to then be managed by other parts of the business. At the same time, the increasing popularity of alternative risk assets is captured within its Capital business, which has exposure to the likes of commercial real estate and housing, which can then be used to the benefit of customers elsewhere within the overall group offering.
Indeed, such is the dependency and connection between the units, a multi-decade customer relationship is usually achieved as the customer switches between requirements as time passes, from the initial investment and growth stage to the drawdown and withdrawal chapter. As such, the reliability of the relationship and the ongoing fees enables a certain visibility of earnings over the longer term.
The group set out a five-year plan in November 2020 and is confident of achieving the objectives. The strength of this year’s showing puts the group firmly on track, to the extent that even zero growth in cash and capital generation from here to 2024 would still hit the desired target of £8 billion to £9 billion of cumulative cash and capital.
For the last year, operating profit grew by 12% to £2.52 billion, ahead of estimates of £2.45 billion, with new business from PRT rising from £7.2 billion to £9.5 billion. This new business growth included a 23% contribution from international markets, underpinning the group’s further expansion plans in the US, Asia and Europe in addition to its primary UK market.
Return on Equity improved slightly to 20.7%, while the Solvency coverage – a measure of capital strength and stability – rose from 187% to 236%. Over the last few years, there has been a surplus of capital generation to the tune of £700 million, which provides the group with “strong dividend headroom”. A further increase to the dividend takes the projected yield to around 7.3%, a clear attraction for investors wishing to benefit from higher total returns.
However, there are a couple of notes of caution to an otherwise healthy picture.
As with many asset managers, 2022 was a tough trading environment and the Investment Management (LGIM) business was no exception. Operating profit fell by 19% at LGIM, primarily due to market moves, while the cost/income ratio rose to 65% from a previous 58%. More positively, flows increased from £34.6 billion to £49.6 billion, while work is in place to increase the general efficiency of the unit.
The impending retirement of the CEO has also dampened some of the enthusiasm for company prospects. During his tenure, there has been a total shareholder return in excess of 600% and, while the replacement process and handover are likely to take around a year, there is always the risk of the loss of some momentum.
With a business model which comprises units of high synergy, strong capital backing and ambitious growth targets in each of its markets, L&G is well placed to consolidate its success hitherto.
The share price, which has risen by 11% over the last year as compared to a gain of 13.7% for the wider FTSE100, has also comfortably kept its head above water over a three-year period in which others have struggled. The recent downgrade of the market consensus to a 'hold', albeit a strong one, could be subject to more positive revisions given the general direction of travel which the group is displaying, and with mixed results coming from other parts of the sector.
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