ii view: Legal & General boosts profit and offers 7% divided yield

Exposure to an ageing population and profit aided by direct investments. Buy, sell, or hold?

Full-year results to 31 December 2021

• Operating profit up 11% to £2.26 billion
• Profit before tax up 76% to £2.63 billion
• Solvency II coverage ratio of 187%, up from 175%
• Total full-year dividend up 5% to 18.45p per share

Chief executive Nigel Wilson said:

“We have a track record of value creation and a longstanding commitment to Inclusive Capitalism and ESHG.  The expected reform of Solvency II, the roll-out of the UK government's levelling up programme, and our growing international businesses underscore our confidence in our ability to continue delivering on a broad range of profitable growth opportunities."

ii round-up:

Legal & General (LSE:LGEN) today posted record results on a number of fronts, with profit broadly in line with City expectations. 

Post-tax profit exceeded £2 billion for the first time, while revenues at its asset management business surpassed the £1 billion marker. Crucially, L&G’s exposure to Russia is small at approximately 0.1% of its assets under management. 

L&G shares rose by around 4% in UK trading, bringing their gain since pandemic market lows in March 2020 to more than 80%. Shares for rival Aviva (LSE:AV.) are up by a similar amount, while Asia-focused Prudential (LSE:PRU) is up by just over 30%.  

A strong rebound in the housebuilding market and valuation increases helped L&G’s alternative asset, or capital investment business (LGC) post the biggest gain in operating profit of 68%. The division has direct investments totalling around £29 billion, including some £1.4 billion invested in renewable energy. 

New business growth aided operating profit at its insurance division to expand by 42%. A 5% year-over-year increase in the total full-year dividend to 18.45p per share also proved in line with management’s medium-term goals.  

L&G’s Annual General Meeting is scheduled for 26 May. 

ii view:

Legal & General is primarily a global provider of retirement solutions, like pensions, to corporates and individuals. It operates across five business divisions including retirement businesses for both institutional and retail, investment management, insurance and alternative asset or a capital investment business. 

Its strategy is to remain a leader in the global retirement solutions and insurance markets. L&G’s lists its six growth drivers as ageing demographics, globalisation of asset markets, investing in the real economy, welfare reforms, technological innovation and addressing climate change. 

For investors, a combination of economic and geopolitical tensions offer some uncertainty around the outlook. Intense competition in the asset management industry is also worth remembering, as is the group’s exposure to the cyclical housing market through its capital investment business.

On the upside, L&G’s exposure to ageing demographics and pension provision remains central. An investment management business with over £1 trillion of assets under management is no small player, and its five business divisions inject some degree of diversity. For now, and with its shares sat on a historic and estimated future dividend yield of over 7%, income investors will likely stick with this insurance giant.   

Positives: 

• Diversity of both product and geographical location
• Attractive dividend payment (not guaranteed)

Negatives:

• Direct investments such as property take time to sell
• Subject to changes in insurance regulation

The average rating of stock market analysts:

Buy