As a former investor in financial services giant Legal & General (LSE: LGEN), I have certainly appreciated the firm’s juicy dividends in the past. At the right share price, I would be happy to add Legal & General back into my portfolio.
Lately I have been looking at the business prospects and Legal & General dividend forecast as part of my research into the firm.
Should I buy?
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Dividend policy
The company is fairly unusual in that it sets out a clear plan of what it intends to do with its dividend.
From 2021, that was to grow the dividend annually at low to mid single digits in percentage terms. The company’s stated ambition was for earnings per share to grow quicker than dividends.
If it succeeded in doing that, dividend coverage by earnings would grow. But earnings per share can move around for any company, so even if they fall one year, I still expect Legal & General to try and stick to its policy of modest dividend raises.
In each of the past two years, the company has delivered a 5% annual dividend rise.
Increases expected
Dividends are never guaranteed though. Indeed, Legal & General failed to raise its payout in 2020 and cut it in the last financial crisis. How optimistic ought investors to be about the outlook now?
The dividend was covered around two times over by earnings last year. I see that as a decent level of coverage. With a dividend yield of 8.6%, the shares certainly grab my attention.
In line with the policy, I expect an annual dividend increase of around 5% in each of the next couple of years. If that Legal & General dividend forecast turns out to be correct, it means that the prospective dividend yield a couple of years from today is 9.5% at the current share price.
Should I buy?
That high yield from this blue-chip FTSE 100 member certainly grabs my attention!
But the share price performance is a concern for me. Over the past five years, the shares have lost 19% of their value.
So although the Legal & General dividend forecast tempts me, could I end up seeing some of the value of my potential investment destroyed by a falling share price?
I think that could happen. Clearly the company, which is highly profitable, is not popular with all investors. But I think the share price fall actually makes Legal & General more attractive to me. It means the company now trades on a price-to-earnings ratio of just 6.
I think that looks cheap. The firm is highly profitable, has a strong brand, benefits from a large customer base and operates in a sector with high demand. I do see risks. Turbulent stock markets could cut returns, for example, hurting profits.
But the risk-to-reward ratio here looks good to me. If I had spare cash to invest, I would add the company back into my portfolio at its current price.
