L&G stays stable – can it win over pessimistic investors?

Retirement and insurance firm L&G has kept its dividend and stays profitable. Our head of markets examines its longer-term prospects.

Legal & General (LSE:LGEN) remains a stable business in an unstable environment, although the sector in which it operates remains generally unloved.

The long-term savings market remains one which is ripe for growth, while the increasing use of pension risk transfers by companies to the likes of L&G is an increasingly important feature. 

At the same time, the annuities market has had a new lease of life and the resurgence of the equity release or lifetime mortgage market also plays to the company’s strengths. Ageing demographics, supported by an increasingly sophisticated multi-asset investment approach, are likely to become the norm. This offers opportunities to L&G in the lucrative US market, in addition to its core UK business.

Less positively, the pressure on interest rate yields in both the US and the UK has resulted in a difference in the way which reserves are calculated, and this “investment variance” of £483 million is alone enough to depress the overall profit numbers, even though it is not a realised loss. 

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At the same time, the pandemic has also had an impact on L&G’s revenues in its annuity business, where sales decreased by 15%, and the lifetime mortgage area, where there was a decline of 26%. The company has also issued a further £1 billion of debt, adding to a reasonably bloated position, although the manoeuvre has also added liquidity.

Indeed, the solvency coverage ratio has improved to 173%, with the group enjoying £7.3 billion of surplus capital as well as an unused credit default reserve of £3.5 billion. The strength of the company’s overall financial position means they are keeping their dividend, albeit this is flat year-on-year. Even so, the dividend yield of 8% is notable. It represents a blatant invitation to income-seeking investors starved of yield elsewhere, the dividend remains untouched, unlike most of its competitors, and it is also well-covered, which should underwrite the payment continuing to be made in the future.

Those figures underline the strength and scale of the company’s offerings, where assets under management at the investment management unit currently stand at £1.24 trillion, an increase of 4% in the period, and where annuity assets of £81 billion include new business premiums of £4.2 billion.

However, the investment variance, along with costs arising from the pandemic estimated to be around £129 million, have inevitably had a detrimental impact on the results. While operating profits were down by just 6%, post-tax profits suffered a decline of 67% to £290 million. 

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Ongoing volatility in asset markets generally could prove either a blessing or a curse for the company and, in any event, the economic effects of the pandemic are already being felt. The outcome of the UK’s negotiations on its exit from the EU also remains unclear, which adds to the mix of dampened sentiment in L&G’s home market.

For all the resilience the company has shown, L&G has struggled to make headway in the face of investor pessimism, despite the obvious long-term potential of the sector. 

While the price has made something of a recovery in the last three months, rising by 12%, this does not mask an overall decline for the last year, where the shares remain down 13%, which compares to a decline of 16% for the wider FTSE 100. The market consensus of the shares as a ‘hold’ is unlikely to become subject to any notable upgrades given the current circumstances.