Legal & General (LSE: LGEN) shares are on fire. Or so it seems, judging by their impressive 55% jump over the last five years.
Since I hold the shares I’m thrilled to see that, but also suspicious. So I checked the last piece I penned on the FTSE 100 insurer and asset manager on 8 March and found the five-year return was a mere 2.8%. That’s quite a difference over 12 days!
Then I got it. Five years ago, global stock markets were in turmoil, amid the first pandemic lockdowns. That means today’s metrics start from a notably low base. Which applies to every stock, and makes me even more sceptical about past performance figures.
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Especially since they don’t account for dividends, which in the case of Legal & General, are stellar. The trailing yield’s 8.6%.
Is this FTSE 100 stock as good as it looks?
The board’s commitment to rewarding shareholders was underlined on 12 March when full-year 2024 results included a £500m share buyback, beating the £450m forecast. This is part of a broader plan to return more than £5bn to shareholders over the next three years.
Legal & General reported a 6% rise in core operating profit to £1.62bn, amid record retail annuity sales. That dividend isn’t just high, it’s rising, with the full-year payout hiked 5% to 21.36p.
Despite all that, the share price grew just 0.5% over the last year, albeit with plenty of volatility in between.
One factor is that both inflation and interest rates have remained higher than hoped, slowing the economy and allowing investors to get a decent yield from cash and bonds, without chancing their capital on dividend stocks. Current stock market volatility will hit the value of Legal & General’s assets under management, and slow customer inflows too.
Legal & General’s strategic push into the US market doesn’t look quite as exciting in the short run, as Wall Street slips. Trade tariffs add another layer of uncertainty. Annuity sales may retreat when interest rates do.
Another notable Legal & General metric that has shifted dramatically is the price-to-earnings (P/E) ratio. A couple of years ago, the shares traded at around eight times earnings. Last year, the P/E climbed to 31 and has now rocketed to 85 times.
This reflects the fact that in 2022, earnings per share (EPS) fell 62% to 19.4p, then another 43% to 7.35p in 2023 and 61% to just 2.89p in 2024. Swings in underlying asset valuations aren’t helping here.
I’m focusing on those dividends
The board has committed to driving up EPS, but I’ll keep a close eye on that. Happily, it’s generating plenty of cash, and the dividend looks secure despite that dizzyingly high yield. I struggle to get excited about share buybacks, but others might.
Looking ahead, 16 analysts have provided one-year share price forecasts have set a median target of 265.3p. If accurate, this represents a modest increase of around 6.75%. I don’t take forecast seriously, but that sounds about right to me. Combined with the yield, that would give me a total return of 15%. I’d be happy with that.
I get my next dividend on 8 June and, like all the others, it will reinvested to buy more shares in Legal & General, which will pay more dividends. I’ll treat any share price growth as a bonus.
