I used to hold shares in insurer Legal & General (LSE: LGEN). I liked its long-term growth prospects and still do. But as an investor, I also appreciated the Legal & General dividend. It has increased most years in the past two decades. The firm has a dividend policy that aims to keep the payout growing annually, although that is never guaranteed.
After frantic share selling in the pensions market caused some well-known FTSE 100 names to fall sharply, I took advantage to add Legal & General back into my portfolio this week. Here are three reasons why – and one concern I have.
The Legal & General dividend yield is 8.2%
I never buy a share just because of its dividend yield – doing that can lead me into buying value traps. But if I think a company has good prospects and sells at an attractive price, then I may consider its dividend yield when investing.
At the moment, the financial services company’s shares are selling for a fifth less than they were a year ago.
That might sound like bad news. But, along with a 5% increase in the interim dividend announced in August, it has had the effect of pushing the Legal & General dividend yield up to 8.2%.
On top of that, the stated policy aims to see dividends grow for the next couple of years at least. Although dividends are never guaranteed, I am optimistic that the firm’s strong business can help support that.
Strong business with good prospects
The company has a long history and large customer base, meaning that lots of people are familiar with its umbrella logo and brand.
I think demand for financial services such as insurance will continue to be strong. There may be some negative impact from a recession. But over the long term, I see the Legal & General business as one that could keep growing revenues and profits.
However, there is also a risk here. The recent turmoil in corners of the pensions market has forced some financial services groups to dump assets to meet calls for cash, which could badly hurt their profits. That could have a direct or indirect effect on Legal & General, in my view, hurting profits if the firm is forced to sell assets in a buyer’s market.
However, in a trading statement this week, the company reassured the market thus: “Despite volatile markets, the Group’s annuity portfolio has not experienced any difficulty in meeting collateral calls and we have not been forced sellers of gilts or bonds”.
I see that as a positive sign, although there may be further turbulence ahead. Any big fall in profits could lead to a cut in the Legal & General dividend.
Attractive valuation
In the statement, the company reiterated its expectation that full-year operating profit growth would be 8%, in line with what it delivered in the first half. For a mature business operating in a difficult environment, I see that as a creditable result. It seems to me like further evidence of the quality of the Legal & General business.
Despite that, the company trades on a price-to-earnings ratio in single-digits. I think that is an attractive price for a quality business. That is why I have bought Legal & General shares for my portfolio this week.
