Legal & General (LSE: LGEN) shares continue to be popular with clients of online broker and fellow FTSE 100 member Hargreaves Lansdown.
This might seem surprising considering how poorly the stock has performed in 2023 so far.
Market laggard
At the close of play on Friday, 1 September, the asset manager and life insurer’s share price was down 13% year-to-date. That’s a significant lag to the FTSE 100 as a whole. While the Footsie has hardly had a ‘great’ 2023, the latter is only very slightly down over the same period.
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Despite this, Legal & General occupies the third spot in Hargreaves’s latest list of most popular buys. Only Rolls-Royce and Nvidia were more in demand, no doubt due to the amazing momentum seen in the share prices of both in 2023 so far.
Why so popular?
Look beneath the bonnet and I think L&G’s popularity isn’t actually that hard to fathom.
Getting closer by the day to the 52-week low set back in October 2022, the stock scores highly on traditional value metrics. The price-to-earnings (P/E) ratio for the current financial year, for example, is just over nine. That’s cheap.
But such a low valuation also feels logical. Companies in the financial sector rarely command high price tags due to their rather plodding nature and vulnerability to general market wobbles.
With regard to the latter, it’s fair to say that the UK economy hasn’t thrived for quite a while. In line with this, L&G’s shares are 13% down from where they were five years ago.
Granted, the actual result is a bit better once dividends are factored in.
High yields
Speaking of which, the major attraction as I see it is the passive income stream.
Based on an expected 20.3p per share total return for the current financial year, Legal and General shares have a staggeringly high dividend yield of 9.3%. That’s way above the last inflation figure we had (6.8% in July).
Of course, some of this will be down to the fall in the share price (which pushes the yield up).
Even so, it’s worth noting that only three other companies in the FTSE 100 have higher yields. The index itself offers ‘only’ 3.8%.
Low cover
The question I then ask is: how sustainable is this payout?
On an optimistic note, the business does have a good record of paying (and consistently hiking) its cash returns.
Having said that, the extent to which this year’s total dividend is expected to be covered by profit — 1.14 times — is quite low. As a rule, the lower the cover, the greater the chance of a cut.
Still, even if L&G is forced to slash payouts in response to further economic woes, I think the yield will still look respectable. Moreover, ageing populations should prove a huge tailwind for business over the long term.
So, I’m not overly concerned for now.
Are these shares for me?
Considering that it’s lost investors money over both the short and long term, I can see why this stock carries a low price. Then again, I can also see why so many income investors might be buying in an effort to keep growing their cash during troubled times.
I certainly wouldn’t dismiss opening a position here myself when cash becomes available.
