ii view: profit grows at income play Legal & General

A 6% plus dividend yield and exposure to ageing demographics. Buy, sell, or hold?

First-half results to 30 June

• Operating profit up 14% to £1.08 billion
• Solvency II coverage ratio of 183%, up from 173%
• Interim dividend up 5% to 5.18p per share

Chief executive Nigel Wilson said:

"Thanks to the hard work and dedication of my colleagues across Legal & General, we have delivered a strong set of financial results. And we expect to deliver double digit growth in operating profit at the full year.

“We're continuing to make investments that are economically, environmentally and socially valuable, in line with our long-term commitment to delivering Inclusive Capitalism and supporting the Building Back Better and Levelling Up agenda.”

ii round-up:

Pensions and insurance company Legal & General (LSE:LGEN) today reported forecast beating profit, aided by a recovery in its housing related investments and Covid related mortality adjustments for its retirement business.

First half operating profit to the end of June of £1.08 billion exceeded analyst forecasts of just under £1 billion, with management flagging its expectation for double digit growth in full-year operating profit. 

L&G shares rose by more than 2% in UK trading, bringing their gain since pandemic induced market lows back in March 2020 to more than 90%. Shares for rival Aviva (LSE:AV.) are up by a similar amount. Shares for Asian focused Prudential (LSE:PRU) have gained by around 76%. 

Operating profit for L&G’s alternative asset or capital business, including its housebuilding related investments, doubled year-over-year to £250 million. A one-off £49 million Covid related mortality adjustment helped its retirement division to report an above forecast profit of £683 million. 

The interim dividend was increased by 5% to 5.18p per share. Its first increase in two years. The total dividend for both 2020 and 2019 was 17.57p per share. The cumulative total dividend payment since the start of 2020 of £1.4 billion is set against management’s ambition to pay dividends of between £5.6 billion to £5.9 billion during the period 2020 to 2024. 

Asset under management for its investment management division rose by 7% to £1.3 trillion. Operating profit for the business increased by 4% year-over-year to £204 million. Strong new business for its insurance division helped its operating profit to rise by 52% to £134 million. 

ii view:

Legal & General is primarily a global provider of retirement solutions 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, ongoing Covid-19 related uncertainty cannot be forgotten. Intense competition in the asset management arena also needs to be remembered. As does the group’s exposure to the cyclical housing market through its alternative asset or a capital investment business.

On the upside, its 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 offer some degree of diversity. In all, and with its shares sat on a historic and prospective dividend yield of over 6.5%, L&G shares look attractive to income orientated investors.  

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 pension regulation

The average rating of stock market analysts:

‘Buy’