Legal & General’s (LSE:LGEN) a FTSE 100 stalwart offering a solid dividend yield. Known for its stability and consistent returns, it’s a favourite among income-focused investors.
In fact, with the share price pulling back in the past few months, the dividend yield’s once again pushed higher. That’s because yields rise as prices fall, and vice-verse.
So if I were to buy the stock today, I could lock in an 8.8% dividend yield. That’s one very appealing reason to buy the stock.
However, we need to take a look at the full picture.
Supportive trends fading?
RBC Capital Markets recently highlighted concerns over Legal & General, downgrading it from Outperform to Sector Perform. RBC cited that the pension risk transfer (PRT) market has “lost some of its lustre”, cutting its target price from 295p to 245p.
The bank, which recently took over UK investment manager Brewin Dolphin, said it believes the PRT market accounted for 50% of expected earnings through to 2028. As such, it downgraded the insurer and wealth manager based on these challenges.
It’s true that bulk purchase annuities (BPAs) — a type of PRT where the pension plan purchases annuities in bulk — has previously been cited as a supportive trend for Legal & General. And in 2022, Legal & General was the UK’s No 1 BPA provider.
This is definitely a concern for investors and the re-rating has had an impact on the share price.
However, it’s worth noting that many analysts still remain positive on the PRT and BPA market. One forecast I’ve seen suggests the PRT market could be worth £80bn in 2024, up from £50bn last year.
Moreover, as of late 2023, only 15% of the UK’s defined benefit programmes’s been transferred to insurance providers.
Analysts broadly upbeat
RBC has slashed its outlook, essentially holding a Neutral view on the company, but the consensus is broadly positive.
Currently, there are five Buy ratings on the stock, two Outperform, six Hold ratings, and just one Underperform. The average share price target’s 263p, inferring the stock’s currently discounted by 13.9%.
While this isn’t much of a discount compared to other stocks on the FTSE 100, including BT Group and IAG, big dividend stocks don’t tend to offer much in the way of share price growth.
And this broadly positive sentiment’s reinforced by attractive earnings metrics. The stock’s trading at 12.4 times forward earnings, and this is expected to fall to 9.9 times in 2025 and 9.1 times in 2026. That’s a very positive trajectory for a company in what we’d generally term a fairly mature industry.
The bottom line
I hold Legal & General shares in my portfolio on the premise that I’ll receive around a 9% return in the form of dividends. Of course, these are never guaranteed, but I see it a little like some of my bond holdings. I’ve bought it, and I’m going to leave it to make modest annual contributions to my portfolio.
Moreover, while the current share price could be a good entry point, I’m wary that my portfolio’s already quite heavily weighted towards insurers. So I don’t intend to buy more any time soon.
