Legal & General (LSE:LGEN) shares pushed downwards last week amid concerns about UK inflation, the US debt ceiling, and a recession in Germany. But this also served to make the one of the strongest dividends on the FTSE 100 even stronger.
So, let’s take a closer look at this dividend giant, and explore why I think it’s an unmissable bargain right now.
Valuation and metrics
Legal & General is a multinational financial services and asset management company. It’s not the sexiest of companies to invest in, and that’s reflected in its valuation. The company currently trades at just 5.95 times earnings, making it one of the cheapest stocks on the blue-chip index.
Meanwhile, a discounted cash flow analysis suggests a fair value per share of 388.47p, inferring the stock could be undervalued by 40%.
This is also reflected in an average target price on the shares — 328.15p. Once again, this suggests a sizeable upside to the stock which is currently trading around 225p.
Some of this upside was created when the US banking fiasco sent financial stocks around the world tanking in March. Prior to this, Legal & General was trading for around 265p a share.
Despite the falling share price, several key metrics have continued to improve. At the end of the financial year, the company’s solvency II coverage ratio rose to 236% from 187% during 2022. And the full-year dividend was lifted 5% to 19.37p a share.
Now, the dividend yield sits at 8.5% — far above the index average of 3.6%.
Looking back at the past five years, we can observe that Legal & General has been able to grow its dividend in all but one year — 2020. And dividend coverage remains strong at 1.8 times earnings — this is complimented by strong cash generation.
| Year | Dividend per share |
| 2022 | 19.37p |
| 2021 | 18.45p |
| 2020 | 17.57p |
| 2019 | 17.57p |
| 2018 | 16.42p |
What’s next?
Going forward, things look rather positive. The London-based firm is a major player in the bulk annuity space — this is an insurance policy purchased by trustees of a defined benefit pension scheme to offload risk. It’s anticipated that 2023 will be one of the best years on record for bulk purchase annuities.
We can also observe that Legal & General has built a sizeable investment management business in recent years. Last year, operating profit fell to £340m from £422m, but the investment arm should perform well over the long run given general positive trends in the market.
Maybe I should be a little concerned about the volatility in the gilts market and the company’s modular homes business — it recently stopped production at its Yorkshire facility as the enterprise failed to become profit-making.
But, broadly, there’s a lot to be optimistic about here. And this is why I’ve been taking the opportunity to top up my position.
