Legal & General (LSE:LGEN) is a blue-chip FTSE 100 stock. But it’s been a pretty volatile year for the financial services specialist. The stock is currently down 6% over the past month and is down 7% over the past 12 months.
However, I already own shares in Legal & General, and I’d buy more at the current price.
A top dividend stock
Legal & General is one of the top-paying dividend stocks on the index. At this moment, the yield stands at an impressive 9.3%. That’s not inflation-beating, but few things are right now.
Last year, the dividend coverage ratio — a metric that indicates how many times a company can pay its dividend from its net income — was 1.85. That’s pretty solid, although a figure close to two would be healthier.
Strong recent performance
In August, Legal & General announced that interim operating profits has risen by 8% in the six months to the end of June. This was driven by higher interest rates and a strong annuity portfolio performance.
Operating profit rose to £1.16bn. The firm’s investment business saw third-party inflows jump to £65.6bn from £27.4bn a year earlier. Meanwhile, assets under management fell 3% to £1.3bn.
The company had also performed well in 2021. Pre-tax profits came in at £2.49bn, while profit after tax jumped 28% to £2.05bn. The firm raised its dividend in April after announcing the huge 39% increase in annual pre-tax profits.
Positive outlook
Legal & General is another business that can benefit from higher interest rates. For one, life insurers tend to do well when interest rates rise as it means they have to set aside less capital now to make future payments.
Bank of America recently reiterated its ‘buy’ rating for the stock, highlighting that the business was in strong position moving forward. The bank also noted that there was very little evidence the dividend was in danger.
“Even in a severe shock, L&G’s Solvency position should be robust and the dividend should still be covered. The dividend should not be in any danger”, the bank explained.
It estimated the company’s dividend would average 63% of cash generation between 2022 and 2024, versus a payout ratio closer to 93% over 2013-19.
Bank of America’s target price for the shares was also bumped up from 310p to 315p.
Headwinds
Like any business, there will be headwinds for Legal & General. The increasingly negative economic environment may reduce appetite for its financial services including its stocks and shares ISA offer.
The financial services firm also considers itself to be a “major UK housebuilder“ — not many people know that. But with interest rates on the rise, this segment of the L&G business could see some downward pressure in the coming months.
Why I’m buying!
With a sizeable dividend yield, I see now as a good time to buy more Legal & General stock for my portfolio. But that’s not the only reason. This is a high-quality financial services company and right now it’s trading at an attractive discount — it has a price-to-earnings ratio of just 7.5.
