Legal & General (LSE:LGEN) is among the highest yielding dividend stocks on the FTSE 100. The insurer actually has a dividend yield of 8.7%. Its surpassed only by two companies on the index.
So, why am I sure this is the safest 8% dividend stock on the index? Let’s take a closer look.
Coverage
Dividend coverage is a financial metric used to assess a company’s ability to pay dividends to its shareholders while maintaining financial stability and meeting its other financial obligations.
It is typically expressed as a ratio. And this is often referred to as the dividend coverage ratio. We can do this calculation ourselves by dividing a company’s earnings by the total dividends it plans to distribute to shareholders.
In 2022, Legal & General’s dividend coverage ratio was two times, indicating that the company generated twice as much earnings or cash flow as needed to cover its dividend payments to shareholders.
This robust dividend coverage ratio reflects the company’s financial strength and its ability to comfortably sustain its dividend policy. It also suggests that Legal & General had a healthy buffer to absorb unexpected financial challenges or economic fluctuations while continuing to provide consistent dividends to its investors.
Performance
Despite a challenging macroeconomic environment and contrary to the falling share price, Legal & General’s performance has demonstrated impressive stability.
Operating profit in the first half reached £941m, only slightly below the previous year’s £958m. Furthermore, the insurance giant highlighted its progress towards achieving its five-year objectives of generating £8bn-£9bn in capital by 2024. To date, Legal & General has already generated £5.9bn.
In the results presentation, the board also noted a net surplus generation over dividends of £600m. This was in addition to new business deferred profits totalling £600m. Moreover, during the period, Legal & General’s Solvency II coverage ratio increased from 212% to 230% year on year. This is a critical gauge of financial strength in the insurance sector.
Tailwinds
Looking ahead, I expect more favourable tailwinds than challenges on the horizon.
Firstly, as interest rates begin to fall, we can expect a movement of capital back into equities. This happens as the attractiveness of cash and debt falls as interest rates moderate.
This shift may act as a catalyst for improved performance within the L&G Investment Management (LGIM) division, which has been lagging.
During the first half, elevated interest rates had a negative impact on asset prices. This resulted in a 10% year-on-year decrease in assets managed by the insurer.
Secondly, I believe Legal & General is well-positioned to capitalise on positive trends in bulk purchase annuities. Considering that only 15% of the UK’s defined benefit pension liabilities have been transferred to insurers thus far, there may be ample opportunity for growth in this sector.
However, despite these tailwinds, it’s worth noting that the company is now under new leadership following the retirement of Sir Nigel Wilson. This introduces an element of uncertainty. But, for me, I still view Legal & General as an excellent dividend stock with potential for share price growth as well.
