Why Legal & General Group Plc Should Be A Winner This Year

Legal & General Group Plc (LON: LGEN) is set for earnings growth in 2014.

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Pound CoinsLegal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) is among the insurance companies that managed to keep its dividend going right through the recession, while a couple of its rivals were forced to slash theirs. In fact, not only was the annual payout maintained, but it was hiked handsomely each year.

But what does 2014 have in store?

Let’s start with a look at the past five years, together with the latest consensus:

Should you invest £1,000 in Legal & General right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General made the list?

See the 6 stocks

Dec EPS Change P/E Dividend Change Yield Cover
2008 -17.88p n/a n/a 4.06p —  5.3%  -4.4x
2009 14.82p n/a 5.4 3.84p -5.4% 4.8% 3.9x
2010 14.07p -5% 6.9 4.75p +24% 4.9% 3.0x
2011 12.42p -12% 8.3 6.40p +35% 6.2% 1.9x
2012 13.90p +12% 10.5 7.65p +20% 5.3% 1.8x
2013* 15.63p +12% 13.8 9.27p +21% 4.3% 1.7x
2014* 16.94p +8% 12.7 10.65p +15% 4.9% 1.6x
2015* 18.32p +8% 11.8 11.78p +11% 5.5% 1.6x

* forecast

What a bargain that was!

Firstly, did you buy any at the end of 2009 when the shares were priced at around 80p and on a stupidly low price-to-earnings (P/E) ratio of just 5.4? You didn’t? Me neither. But those who did have since seen their shares soar 170% in value to 216p today, and they’ve had those lovely dividends rolling in too.

Now, let me offer a note of caution — those dividends are looking a bit overstretched to me. Aviva was forced to slash its dividend in 2012 and bring it down to more sustainable levels, and its 2013 dividend looks set to be covered around three times by earnings.

At just 1.7 times, I’d say Legal & General’s expected cover is looking a bit fragile. At the very least, I’d prefer to see cover being maintained and the dividend rising no faster than earnings — at least until the economic recovery is looking a bit stronger.

Board optimism

But Legal & General’s board appear to think that the company is heading for lucrative times and that continuing to boost the dividend ahead of earnings is justified. Are they right?

Well, at Q3 time reported in November, we heard that year-to-date net cash generation was up 20% to £740m, with year-to-date gross inflows up 65% to £42.1bn. Total assets under management came to £443bn.

And at the first-half stage earlier in the year, Legal & General had already bumped up its interim dividend by 22% to 2.4p, saying the decision was backed by “the Board’s confidence in the strength of Legal & General’s financial performance“. And judging by forecasts for 2014 and beyond, that bullishness is probably here to stay.

Looking good

Barring unforeseen disasters (and providing my niggling concerns over the relatively weak dividend cover prove unfounded, at least in the short term), we should be looking at a healthy earnings rise in 2014 together with an even nicer dividend rise. And with a year-end P/E of under 13 and dropping to less than 12 by the end of 2015, I can see the share price gaining a bit more this year too.

Verdict: Everything up in 2014!

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alan does not own any shares in Legal & General or Aviva.

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