Shares in FTSE 100 financial services firm Legal & General (LSE: LGEN) are down 9% from their 12-month high.
The catalyst was fear of a new financial crisis after Silicon Valley Bank and Credit Suisse failed last March.
No new financial crisis emerged but Legal & General shares are still marked down.
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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 considering adding to my existing holding of the shares for three key reasons.
Core business looks strong
H1 2023 results showed its Solvency II coverage ratio increased to 230% from 212% in H1 2022. A ratio of 100% meets the requirements for UK financial services companies.
The results also 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.
These figures underlined to me the unwarranted inclusion of the firm in March 2023’s financial sector share slide.
Very positive as well is that it remains a market leader in the UK Pension Risk Transfer (PRT) space. This is where a company takes over other firms’ pension scheme commitments and is paid for doing so.
It is also in the top 10 in the high-potential US PRT sector. Only around 9% of this market’s $3trn of defined benefit pension schemes have been transferred so far.
Good price?
Just because a company’s share price has fallen does not mean it is undervalued, of course. It may simply indicate that the firm is worth less than it was before.
To ascertain which is true here, I started by comparing its price-to-earnings ratio (P/E) with those of its peers.
Legal & General’s P/E is 7.3, Prudential’s is 7.9, Hansard Global’s is 10.8, Admiral’s is 20.6, and Beazley’s is 28.8.
Given this peer average of 17, Legal & General’s 7.3 looks very undervalued.
To work out by how much, I applied the discounted cash flow (DCF) model, using several analysts’ valuations and my own.
The lowest core assessment for Legal & General is 55% undervalued at its current share price of £2.46. Therefore, a fair value per share would be around £5.47.
Of course, the shares may never reach that price. But it does underline to me that they seem to offer very good value and have lots of potential to rise.
Big dividend-payer
Legal & General paid out 19.37p per share for 2022. Based on the current share price, this gives a yield of 7.87%.
In its H1 results, it said it will increase the payout by 5% to the end of 2024. This would mean a 20.3385p payout, giving a yield of 8.3%, based on the current share price. Next year, it would mean an 8.7% payout on the same basis.
An 8.7% yield sustained over 10 years would add £8,700 to an initial £10,000 investment. And reinvesting the dividends to buy more of the stock would make another £13,030 instead over the same period.
This assumes the yield averages the same over 10 years. It also does not include tax paid according to individual circumstances.
