When I look at the Legal & General Group (LSE: LGEN) share price and see how it’s fallen in the past year, I have to think it’s too low.
A share price fall alone doesn’t mean a stock is cheap. No, they often slump for very good reasons.
But when the fall has helped push the dividend yield as high as 8.6%, It makes me sit up and take notice. And now we have news that suggests business is going well.
Pension buy-in
On 24 November, Legal & General announced what it says is the “UK’s largest single buy-in by premium size“, and “for L&G, the largest single transaction by number of members“.
We’re talking about the Boots pension scheme here, as the insurance firm has agreed a £4.8bn full buy-in with the health & beauty retail giant.
In total, L&G has now written £13.4bn of Pension Risk Transfer (PRT) so far in 2023.
Who says the insurance business is having a tough time this year? Judging by the Legal & General share price, most of the big investment firms, I guess.
Good forecasts
Broker forecasts are a lot more bullish than we might guess from the share price chart. The stock is on a price-to-earnings (P/E) of 13 for the current year. But if earnings grow as predicted, we should see that drop to about 8.5 in a couple of years.
The tipsters say the the dividend yield could rise as high as 10% by 2025 too.
That’s on the current share price, and it shows how buying when a stock is low can help us lock in better long-term dividend yields.
Bigger yields
By 2025, if these forecasts come true, I expect the L&G share price will have gained a bit. So the same dividend cash would provide a lower yield.
But those who take on the risk and buy today could secure that 10%. And that’s the kind of yield that can provide long-term riches.
For example, what might putting £100 a month in a stock paying 10% a year in dividends get me? Well, it could reach more than £70,000 in 20 years.
I really don’t see it staying at 10% for 20 years. But I think it shows the value of any cash we might invest now, while yields are so high.
Uncerainty
Forecasts are clouded with uncertainty right now. And I expect the whole financial sector — banks, insurers, investment firms — to stay wobbly until the economy gets closer to normal.
How long might that take? I’ve no idea, but I suspect longer than a lot of people think. Still, I rate the sector as a long-term cash cow. And I think the short-term risk is worth taking.
So will I buy Legal & General shares? Well, I already bought some Aviva shares a few years ago. And though the share price has gone nowhere, I’ve at least been getting some decent dividends.
But yes, L&G is high on my list for my next buy. Hmmm, unless I go for Phoenix Group Holdings, with its 10% forecast dividend.
