Legal & General results satisfy income seekers

After getting caught up in the stock market crash, L&G shares are cheap versus consensus estimates.

A trademark results performance reminded investors today why high-yielding Legal & General (LSE:LGEN) was one of the best-performing stocks in the FTSE 100 index of the past decade.

As well as beating City expectations with a 16% rise in underlying earnings per share (EPS) to 28.66p for 2019, L&G lifted its full-year dividend by 7% to 17.57p a share. This means it has almost doubled its dividend since 2013, resulting in a chunky forward yield of 6.8%.

L&G has continued to benefit from demand for company pension deals, with a record £11.4 billion of bulk annuities in 2019 including the transfer of pension schemes for Rolls-Royce and National Grid. Other highlights in the year included a 22% rise in individual annuity sales to £970 million and a jump in assets under management of 18% to £1.2 trillion.

• Finding dividend opportunities and reliable income
• Income investors warned to expect poor dividend growth in 2020
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

The performance helped shares break the 300p threshold for the first time in December, confirming L&G's status as one of the stocks of the decade. Fuelled by the attraction of that steady dividend growth, shares rose 276% for a total return of 408% in the 10-year period.

The new decade has been less kind, with the stock falling as far as 254p earlier this week as coronavirus fears took hold. L&G said today the impact of the outbreak on its business had been minimal, although the prospect of stock market volatility will inevitably impact on its asset management and savings businesses, including through performance fees.

Source: TradingView Past performance is not a guide to future performance

Adverse market moves have also lowered its solvency ratio by 10 percentage points in the first two months of 2020 to 174%, from 184% at the end of 2019 and 188% in 2018.

While the consensus market view is still for shares to return above 300p, the company has historically struggled to convince the market of its longer-term potential, partly due to the capital-intensive nature of annuities.

UBS, for example, has a “sell” recommendation and 230p price target. The caution comes despite the long-term savings market looking ripe for growth due to ageing demographics, the impact of welfare state reforms and the globalisation of asset markets.

Within this, the resurgence of the annuities market and strong demand for Pension Risk Transfer as companies look to mitigate final salary pension schemes plays into its hands. The overall UK market broke £40 billion in bulk annuity sales for the first time last year, with L&G maintaining its position as market leader.

• A cheap bank share offering respectable dividend income
• Income hunters can find great funds on ii’s Super 60 recommended list of investments

L&G has also targeted similar pensions markets overseas, with US premiums passing US$1 billion for the first time and accompanied by a debut transaction in Canada.

This is part of recent geographical diversification, with L&G's Asian operation making an increasingly valuable contribution and the United States a largely untapped, yet significant opportunity.

Chief executive Nigel Wilson plans to update investors on the company's strategy in November, having just delivered on the company's five-year EPS growth target one year ahead of schedule.

Based on L&G's focus of Inclusive Capitalism, he said the company's five divisions were well placed in “attractive and growing markets”. Wilson added:

“Society’s increasing focus on net zero carbon, ESG investing and levelling up through investment in all regions plays to our strengths, creating future growth opportunities.”