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Legal & General has always been a reliable income stock – but rarely has it been such good value

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Legal & General logo - Alessia Pierdomenico/REUTERS
Legal & General logo - Alessia Pierdomenico/REUTERS

It is difficult to justify the absence of certain FTSE 100 stocks from any income portfolio. Their high yields, solid record of dividend payments and diverse business models make them obvious holdings for income-seeking investors.

One of the best examples of such a company is Legal & General, which has been a member of Questor’s Income Portfolio since the start of 2017. While its capital gain of 5pc since then equates to less than 1pc a year, its dividend return has been exceptional.

It has paid or declared more than 95p per share in dividends since our purchase, which equates to a 37pc income return on our initial investment.

Crucially, the insurer continued to make generous payments to shareholders throughout the pandemic. While many other FTSE 100 companies decided to reduce, postpone or even reverse previously announced dividend payments, Legal & General maintained its 2020 financial year dividend at the same level as the previous year despite the challenging operating conditions.

This highlights its financial stability and the attractiveness of its diverse business model to long-term investors who know that any company is likely to go through periodic bouts of economic uncertainty. This differentiates the company from other high-yielding stocks whose dividend payments are likely to prove more cyclical and less reliable if they are held for an extended period.

Following its decision to maintain its dividend in 2020, L&G then increased its divi by 5pc last year and the payment has now risen at an annualised rate of 5.2pc over the past five years. Future dividend growth should be supported by the company’s range of growth opportunities: it is well positioned to take advantage of long standing and persistent long‑term global trends.

For example, L&G is seeking to capitalise on a forecast increase in the average life expectancy of the world population by expanding its pension risk transfer business. Pension risk transfer is a type of insurance policy whereby a pension scheme pays a premium to an insurer in return for a guarantee that its members will receive their retirement benefits.

Demand for pension risk transfer in Britain alone is forecast to be between £150bn and £250bn over the next five years.

In addition, the company’s focus on sustainable investment and its status as one of Britain’s top 10 housebuilders align it with a wide range of long-term growth trends that are likely to persist in the coming years.

Together, these trends have contributed to a 7.1pc annualised rise in the company’s pre-tax profits over the past five years. As a result, its recent dividend growth rate appears to be sustainable. Dividend cover of 1.8 times earnings further highlights its scope to raise shareholders’ payouts in line with its progressive dividend policy – even during periods of global economic turbulence.

This is likely to prove extremely relevant now, when the outlook for the world economy is so uncertain. Of course, Legal & General’s financial performance is not immune from the impact of factors such as rising interest rates and slowing economic growth.

Its investment management business, for instance, has £1.4 trillion of assets under management and a decline in the financial markets would automatically reduce the fees it receives from its customers, who pay a percentage of the sum they have entrusted to the company.

However, in Questor’s view this threat is more than adequately priced into the company’s shares. They have fallen by 13pc since the start of the year and now trade on a price-to-earnings ratio of less than 8. When combined with a yield of more than 7pc, the company offers a wide margin of safety for new investors.

Legal & General fully deserves its place in our Income Portfolio. But now could represent a particularly opportune moment for anyone who has not yet bought its shares to add them to their own portfolio. The stock’s high yield, low valuation, long-term growth drivers and dividend growth potential make it a highly appealing income stock.

Questor says: buy

Tickers: LGEN

Share prices at close: 258.5p

Read the latest Questor column via telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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