Over one year, Legal & General (LSE:LGEN) shares are down 2.5%. Over five years, the FTSE 100 stalwart is down 11.6%. So if I had invested £1,000 in the stock, today I’d have £884, plus dividends.
Thankfully, the dividend payments would have accounted for around £75 a year. As such, I would have received around £325 in dividends, taking my total returns to £1,209.
On an annualised basis, that’s a return of just 4.2%. It’s clearly not great, but at least I wouldn’t have lost money.
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Bottomed out?
Legal & General isn’t a particularly volatile stock. The insurance giant is trading near its 52-week low, but there’s no guarantee the stock won’t fall further.
One of the issues pushing the stock price down has been interest rates. Higher interest rates have negatively impacted the group’s assets under management (AUM).
Overall AUM fell by £132bn to £1.158trn during the first half of the year alone. This represents a drop of 10% compared to the £1.29trn reported in the same period in 2022.
It’s also the case that investors pulled £19.7bn out of LGIM’s (Legal & General’s investment arm) UK Defined Benefit Solutions business during H1, which amplified the impact of rising interest rates.
So is it all positive from here? Well, it certainly appears to be the case that interest rates have peaked. In turn, as interest rates fall, we’d expect to see capital return to equities, and this should positively impact LGIM’s AUM.
Annuity tailwinds
The bulk purchase annuity (BPA) market is experiencing substantial growth in the UK. These are insurance contracts that see pension schemes transfer the liability for their members’ future pension payments to an insurance company.
In fact, higher interest rates have represented something of a boost for this part of the business. That’s because these provide pension schemes with a guarantee that retirement benefits will be paid.
In 2022, Legal & General was the UK’s No 1 BPA provider, facilitating the highest buy-in and buy-out volumes, totalling £7.2bn. This equated to around 26% of the market. The firm also notched the two biggest transactions of the year.
The BPA tailwind is likely to continue. As of today, only 15% of the UK’s defined benefit programmes have been transferred to insurance providers. Moreover, while interest rates are expected to moderate, they’ll likely remain higher than we’ve seen over the last decade, reinforcing the need for guaranteed pension payouts.
Moreover, it’s worth looking at the trajectory. The BPA market has expanded significantly, from £10bn in 2016 to over £50bn in 2022. How much further could it go?
Total returns
Sometimes we can forget that we, as investors, are searching for total returns. That’s share price gains in addition to dividends.
Personally, I’m aiming for low double-digit returns on an annual basis. With a 8.9% dividend yield, I’d only need a 3%-4% increase in the share price to achieve that. And I think that’s very achievable.
This is why I’ve been topping up my position in the insurer.
