We all know that Warren Buffett’s favourite holding position is forever. However, finding stocks that are able to prosper through multiple business cycles and economic downturns isn’t an easy task. Yet following a recent pull-back, I took the opportunity to buy into a FTSE 100 blue-chip stock that I believe has incredible long-term growth potential.
A powerful business model
Legal & General (LSE: LGEN) is primarily known for its insurance and retail retirement expertise. Indeed, it is the UK’s number one individual life insurance provider.
However, its business tentacles stretch far and wide. Its institutional retirement division takes on pension scheme liabilities from corporate schemes. Doing so helps companies de-risk their liabilities while providing guaranteed payments to individuals within their schemes.
Its investment management division has assets under management of £1.4trn and has deep expertise in defined contribution (DC) and defined benefit (DB) pension schemes.
Finally, its investment capital division invests across a number of specialist asset classes. This includes commercial real estate, clean energy, housing and SME finance. And L&G is a top-10 house builder by revenue.
Growth drivers
The sheer diversity of L&Gs business model is a significant selling point for me. It is in a unique position to capitalise on a number of long-term growth drivers. Many of these drivers provide a significant degree of immunity in a low-growth economic environment.
Ageing demographics is a trend that continues to accelerate across many western economies. Pension risk transfer (PRT) is a huge and growing market. In the UK alone, it is estimated that only 13% of £2.4trn of DB pension liabilities have been transferred to insurance companies such as L&G. The rising interest rate is a likely catalyst for companies to consider accelerating the de-risking of their pension plans.
Pension freedoms and welfare reforms add up to another huge driver for future growth. Over the past few years there has been an increasing awareness of the need to take personal responsibility for financial security, particularly in later life.
Climate change and technological innovation are key drivers too. For example, L&G has invested in over 500 start-ups to date.
Is Legal & General undervalued?
L&G’s recently-released half-year results convinced me that the market is undervaluing its long-term prospects.
In the last 10 years, the company has seen its earnings per share (EPS) and dividend per share grow by a compound annual growth rate of 11%.
EPS for the first six months of 2022 was higher than the company achieved in the whole of 2015. Today however, the share price sits at the same level as back then.
The business is confident that it will consistently grow cash and capital faster than its dividend commitment. This excess cash provides it with tremendous flexibility. It could, for example, decide to return excess cash to shareholders or reinvest for future growth.
Insurance is a risky business. Rising inflation coupled with low global growth is likely to hit L&G’s bottom line. Should inflation become entrenched and policy responses by central banks prove ineffective, a significant economic downturn is likely to follow.
Despite these risks, I feel that long-term structural changes across society are trends that L&G is well positioned to capitalise upon. That is why, in the last few weeks, I added to my position.
