Shares in FTSE 100 financial services and asset management firm Legal & General (LSE: LGEN) have slid since March.
The key reason for this was fallout from the failures of Silicon Valley Bank, and Credit Suisse, in my view. This fanned fears of a new banking crisis and broadly pushed financial stocks down.
No new financial crisis emerged but Legal & General shares are still marked down.
The advent of a genuine new financial crisis does remain a risk for the stock, of course. Another is that inflation and interest rates stay high, acting as a deterrent to new client business.
Nonetheless, I am seriously buying more of the shares, for three key reasons.
Core business poised for growth
Its H1 results showed it has generated £5.9bn of capital from the start of its five-year plan in 2020. It is on track to achieve its target of £8bn-£9bn by the end of 2024, according to the company.
It also increased its Solvency II coverage ratio from 212% in H1 2022 to 230%. A ratio of 100% meets the requirements for UK financial services companies.
To me, this again highlights the illogicality of its shares being caught up in March’s mini-financial crisis.
Its core business looks poised for growth to me. Its retirement solutions operation remains a market leader in the UK Pension Risk Transfer (PRT) space. This is where a company takes over other companies’ pension scheme commitments for a guaranteed return from them.
It is also in the top 10 in the US PRT market. Only around 9% of the US’s $3trn of defined benefit pension schemes have been transferred so far.
Cheap compared to its peers
A big loss in a share’s price does not automatically mean it is undervalued, of course. The drop may simply reflect that the company is worth less than it was before.
To ascertain which is true for Legal & General, I compared its price-to-earnings ratio (P/E) with those of its peers.
Legal & General’s P/E is 6.7, Prudential’s is 9.2, Hansard Global’s is 11.1, Admiral’s is 22, and Beazley’s is 30.9.
Given the peer average of 18.3, Legal & General’s 6.7 appears very undervalued.
To work out how much, I applied the discounted cash flow (DCF) model, using several analysts’ valuations and my own.
The core assessments for Legal & General are between 51% and 55% undervalued. The lowest of these would give a fair value per share of £4.67.
This does not mean that the shares will reach that point. But it does underline to me that they offer very good value.
Big passive income payer
Last year, Legal & General paid out a total of 19.37p per share. Based on the current share price of £2.29, this gives a yield of 8.5%.
In its H1 results, it said it intends to increase the payout by 5% to the end of 2024. This would mean a yield of nearly 9% this year, based on the current share price. Next year, it would mean a payout of 9.3% on the same proviso.
A 9% yield sustained over 10 years would add £9,000 to an initial £10,000 investment. This is over and above share price gains or losses and tax obligations incurred, of course.
