From an income perspective, the appeal of Legal & General (LSE: LGEN) is clear. With its 8.1% dividend yield, the FTSE 100 income share is a passive income machine providing money regularly for legions of investors. But while the dividend side of the equation looks good, the share price has performed less impressively.
Over the past five years, the Legal & General share price has not even managed to stand still, falling 2%.
That might not seem like a big dip. But when taking high inflation of recent years into account, in real terms it is significant. The FTSE 100 index overall has increased 16% during that period.
So is the flat Legal & General share price a possible buying opportunity for me? Or could it be a warning signal that the share is not as attractive as it may at first seem?
Hard-to-please investors
Looking at the performance of the financial services firm over the past few years, it is not obvious why there has been so little apparent enthusiasm for the shares.
The company has been a massive cash generator, returning billions of pounds to shareholders in the form of dividends alongside a share buyback programme. It has been massively profitable, making post-tax profits of over a billion pounds for some years before reporting smaller earnings for the past two years. But even then, the company was still solidly profitable. Last year, for example, it earned £443m after tax.
Perhaps those declining earnings explain why the Legal & General share price has been falling.
Yes, the business is strong and yes, it has been making lots of money. But some of the key business performance measures have been heading in the wrong direction. Not only post-tax earnings but also revenues were lower in the past couple of years than they had been in the few previous years.
Long-term fundamentals
While the reported earnings may not seem reassuring, I think the long-term picture continues to look strong.
Reported earnings can move around for firms like Legal & General due to swings in underlying asset valuations.
When it comes to cash generation though, the business has continued performing well. On what is known (due to the regulatory regime) as a Solvency II basis, last year saw capital generation of £1.8bn, the same as the prior year. That is equal to over a 10th of the firm’s current market capitalisation of £15bn.
Over time, I expect revenues and earnings to move around, perhaps substantially. But I also reckon that the business will continue to generate sizeable cashflows. It has a well-known brand, large customer base and deep experience in the pensions market. I expect client demand for such products to be resilient.
Relative to those cash generation prospects, I think the current Legal & General share price looks like good value. On top of that, the company has a dividend yield over double the FTSE 100 average.
If I had spare cash to invest I would be happy to buy the shares today.
