Legal & General: new business sprain

Champions expect to bask in glory. Yet being a dividend hero did not do much for Legal & General. In April it was one of the few UK insurers to defy pressure from regulators to withhold payouts. Many investors were sceptical. Few of them were surprised by L&G’s announcement on Thursday that payments would not grow so fast in future.

The insurer is almost as proud of investing for the long term as it is of its social mission. As a result, this year’s dividend will be flat, after which it should grow by low to mid-single digits until 2024. By comparison, dividends increased at about 7 per cent a year between 2015 and 2019.

L&G expects the payouts to add up to £5.6bn-£5.9bn between 2020 and 2024. This compares with likely cash generation of some £8bn-£9bn. The surplus will help the group reduce financial leverage, which rose from 31 per cent to 34 per cent in the six months to June, according to Fitch. It also allows for the expansion of a life insurance unit. This has to put up more capital when it takes on new business. 

Boss Nigel Wilson used Thursday’s capital market day to address investors’ fear about Covid-related credit risks. The bond portfolio has little exposure to vulnerable sectors and none to travel and leisure. Just 0.8 per cent became fallen angels, losing their investment grade credit rating. 

Monday’s news about a potential vaccine pushed up L&G’s shares 12 per cent, as concerns about credit eased. Even so, shares look inexpensive, trading on a multiple of 8.7 times forward earnings — 7 per cent below the average since 2010.

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Investors can start to feel more confident about L&G’s prospects. It has proved its resilience this year, with operating profits expected to be similar to those of 2019. Compared with yields available elsewhere, it will still be a generous payer. The sustainability of future payouts makes a yield of 7 per cent attractive. Investors should expect to pay more for a dividend stream they can rely on.

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