Legal & General – A High Yielding Momentum Stock?

By Robert Sutherland Smith

Legal & General (LGEN) is one of those insurance company names which tells you much about the role imagination plays in insurance and assurance; that is to say precious little. The thing that may be said on its behalf as a memorable name is that it provokes more imagery than the name of Standard Life, which conveys the empty abstraction of a void. To have lived long and to be declared to have lived a “standard life” would be a dismal end to a life of reckless possibility. At least the names “Legal” and “General” suggest two fictitious sons of a fictitious Victorian parson who put one into the Army and the other to the Bar. Though to be fair, the word “General” in this case is not a reference to the Charge of the Light Brigade but that which is not particular but, so to say, “general.”  

The preliminary annual results for Legal & General last year were notably good. Moreover, its share price has handsomely out-performed the rise in the FTSE100 index, which in a year has increased by less than 2% whilst the Legal and General share price has risen 20%. That poses the question: does one take a profit or buy the shares? Before considering that, a short canter through the results. 

Net cash rose 10% to £1.1 billion; operating cash increased 6% to £1.1 billion; operating profits were up 10% to £1.17 billion; and earnings per share rose 10% to 16.7p a share. Most impressively, the annual dividend payout was raised 21%. All of this was supported by some strong operational achievements including a 16% rise in stock exchange investment assets managed by Legal and General Investment Management to £708 billion and a 28%increase in annuity assets to £44 billion.  

The things driving this splendid growth (apart from any general rise in the value of investments) include five factors: the fact that in many parts of the world there is an ageing population in need of annuities; the diminishing international barriers to investment management business; welfare reform legislation in various places; the retreat of banks as competitors as they seek to increase capital; and, finally, the digital technology enabling what the company calls “connectivity.” There is also the prospect of new business arising from the decline of defined pension benefit schemes (more usually known as final salary schemes) as sponsoring companies “de-risk” their balance sheet liabilities in deals with companies like Legal & General.    

So are these shares for selling or buying? First and foremost are the attractions as a dividend growth share. The company has a strong record in growing dividends over the last five years, to which we may now add the 21% growth last year. The market consensus estimates have dividends increasing by 15% to 13p a share this year and then by nearly 11% next year to an estimated 14.4p, putting the shares at the current price of 280p on prospective estimated annual dividend yields of 4.7% and 5.1%

“Technically” the share price chart seems to exhibit a strong trend of upward momentum giving these shares the attractions of both estimated dividend yield and perceived momentum.