A punchy performance from high-yielding Legal & General

This is a punchy performance with Legal & General Group (LSE:LGEN)’s plan clearly coming together, even if heightened expectations have weighed against the share price in opening trades. However, seen through the longer-term prism in which the group operates, prospects are even brighter.

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L&G is in a new phase and is executing at pace. For this period alone, core operating profit rose by 6% to £859 million compared to estimates of £816 million and pre-tax profit by 28% to £406 million, with the latter figure already surpassing the entirety of last year’s contribution. Growth was led by the main Institutional Retirement business where operating profit rose by 11% to £618 million, bolstered by £5.2 billion of global Pension Risk Transfers (PRT) being written, where the pipeline remains busy.

Elsewhere, the Asset Management arm saw operating profit slip by 5.6% to £202 million due to market volatility and a foreign exchange headwind, although there was an additional annualised £15 million of net new revenues as the group edges nearer to higher margin products. In Retail, net new flows of £4 billion represented a rise of 21%, with operating profit ahead by 3% to £237 million. This unit can now boast 12.4 million customers and £101 billion of workplace assets under administration, itself an increase of 7% in the period.

The group’s strategy is now playing out, with the previously announced non-core sales of its US Protection business for £1.8 billion and Cala for £1.35 billion, which will result in a further share buyback of £1 billion when completed, on track. This was in addition to the £500 million buyback undertaken separately, which is now 90% complete. The group has also acquired Proprium Capital Partners, enhancing its capabilities in key growth markets and has secured a long-term partnership with Blackstone to underpin its credit platforms.

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In the meantime, the group’s financial strength enables a target of some £5 billion to be returned over the next three years in dividends and buybacks. In line with its announced growth target, the increase to the dividend lifts the projected yield to a heady 8.2%, paying investors handsomely to wait as the strategy unfolds. As such, the stock has become something of an income staple over recent times.

Perhaps the shining light for the group is the self-feeding, virtuous circle which is created by its sprawling and largely interconnected businesses. The structure of the group allows the generation of assets through its bulk annuity, or PRT business, to then be managed by other parts of the group.

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. Indeed, the group’s store of future profit, including the CSM (Contractual Service Margin) is a measure of profit which will be released over time given the nature of investment and insurance products. In this period the CSM rose to £13.1 billion from a previous £12.9 billion, providing not only an incremental increase to income but also some visibility on future earnings.

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There is little doubt as to the longer-term potential for the savings and investment market, especially given ageing demographics and likely welfare reform and the proposed international expansion adds another tantalising string to the group’s bow.

The solvency ratio of 217%, despite being robust, was shy of the 220% estimate and has weighed on the price at the open, while investment in the plan depressed some of the earnings expectations. Even so, the shares have risen by 22% over the last year, as compared to a gain of 14% for the wider FTSE 100 and the annuity and international angles should provide future areas of growth. Amid heightened expectations and with the strength of the price leading to a slightly lofty valuation, the market consensus of the shares currently stands at a hold, albeit a strong one.