Over the past 10 years, the Legal & General (LSE: LGEN) share price may not have moved much, but it has cemented its credentials as a leading choice for passive income. I have long held the stock in my Stocks and Shares ISA portfolio for that very reason. But can it sustain its market beating returns in the long term?
Long-term returns
Since 2020, dividends per share (DPS) have increased 22%, including a 5% increase last year. The board has recommended that out to 2027, DPS will increase 2% annually. That puts the stock on a forward yield of 9.4%.
Many might balk at the lack of share price growth, but as the following chart shows, long-term investors have been rewarded. Total shareholder returns since 2014 have been 83%, in line with the FTSE 100.
Source: L&G
In 2024, the stock did significantly underperform the broader index. I put this down to the strategic and financial reset last June. After all, markets hate uncertainty. But what it did do was provide the company with an opportunity to clear away some cobwebs and put it back on a path to profitability.
Imitating Aviva?
I remember not too long ago another insurance giant, Aviva, was struggling. The share price had gone nowhere for years. Analysts were queuing up to highlight how big and unwieldy the company was. Today, one would hardly recognise it was the same company.
I believe we are at a similar crossroads with L&G. If it can successfully take a leaf out of its rival’s book, the stock could very quickly come back into favour with the market.
One of the key tenets of its strategy reset is a simplified business model. It has already begun divesting itself of businesses that it doesn’t view as core to its proposition. The sale of CALA is one such example. It has reduced shareholders to the volatile UK housebuilding sector. The £100m in solvency capital will be used to reinvest in the business.
Increasing competition
One major area of concern for me is market disruption brought about by new entrants. The pension risk transfer (PRT) market is growing rapidly. This is leading to increasing competition.
The business has undoubted scale, which it’s able to leverage to provide its services at low cost. However, the continued evolution of AI has the potential to be a significant disrupting force. New entrants, unconstrained by Solvency II liquidity regulations, have the potential to emerge and disrupt conventional business models.
One way the business is trying to address such issues is by moving to a much more capital-light model. Its Retail division, which among other things provide lifetime annuities, is moving towards more of a fee-based model.
The business can trace its roots back to 1836. It therefore knows a bit about how to adapt to a changing world. I certainly wouldn’t class the stock as a lost cause in terms of growth, but the business continues to prioritise shareholder returns.
Over the next three years it intends to return the equivalent of 40% of its entire market capitalisation to shareholders, through a combination of dividends and buybacks. That to me makes it a compelling investment proposition, which is why it remains a core part of my portfolio.
