Legal & General shares have a 8.8% dividend yield! Is there a catch?

Legal & General shares are among the top picks for dividend investors on the FTSE 100. Dr James Fox explores whether they’re too good to be true.

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Legal & General (LSE:LGEN) shares have fallen 8.9% over the past 12 months and 26% over 24 months. And this has contributed to the expanding dividend yield, which currently sits at 8.8%.

The Legal & General dividend yield isn’t the largest on the FTSE 100, trumped by peer Phoenix Group. However, it’s among the most popular.

So is there a catch, or is the Legal & General dividend really that good?

Dividend health

Assessing the health of dividends involves reviewing the yield, which is the ratio of the annual dividend payment to the stock’s current price.

A consistently high-or-rising yield may indicate a strong dividend, while a declining yield could signal potential issues. Equally, an abnormally high yield could be a warning sign for the business.

Additionally, analysing the company’s payout ratio, which is the percentage of earnings paid out as dividends, helps determine if the company can sustain its payments without straining its finances.

Finally, a track record of consistent or growing dividend payments over several years can provide confidence in the health of dividends.

So how strong is this insurer’s dividend? Well, L&G has an amazing track record, with consistent payments across the past two decades.

Moreover, coverage is pretty strong at 1.98 times in 2022. This means the company could pay its stated dividends almost two times from net income.

In other words, the Legal & General dividend looks secure.

However, it’s worth noting that the firm doesn’t engage in buybacks. The company rewards shareholders almost entirely with dividend payments.

Company performance

Amid a challenging macroeconomic backdrop, Legal & General has performed remarkably well. In H1, the company reported an operating profit of £941m, slightly below the prior year’s £958m, but in line with its five-year objectives.

The board aims to generate between £8bn and £9bn in capital by 2024, with £5.9bn already achieved to date.

L&G’s Solvency II coverage ratio, a pivotal indicator of financial strength in the insurance industry, saw a substantial year-on-year increase from 212% to 230%.

The board also highlighted a net surplus generation exceeding dividends of £600m, and a further £600m of new business deferred profits.

Moving forward, Legal & General has been widely tipped as a company to outperform during the medium term.

The business is a leader in the bulk purchase annuity (BPA) market. This market has expanded significantly, from £10bn in 2016 to over £50bn in 2022, and could growth further as only 15% of the UK’s defined benefit programmes have been transferred to insurance providers.

In 2022, Legal & General was the UK’s top BPA provider, handling the most significant buy-in and buy-out transactions, worth £7.2bn.

Some investors may be concerned about a change at the helm after Sir Nigel Wilson retired. And there’s also the issue of the share price being lower than five years ago and one year ago. However, looking beyond that, the firm is on a strong footing, and will hopefully benefit from an improving macroeconomic climate — especially within its investments division.

Collectively, these factors reinforce the notion that the dividend at least is safe. There really doesn’t appear to be a catch.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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