Legal & General (LGEN) is a multinational financial services and asset management company based in the UK with operations in both the UK and US. LGEN also has investment management business in the Gulf, Europe and Asia.
Generally, LGEN’s stock has been a good investment gaining 23% over the last 5 years, but more recently the stock is down 10% from a high in April. LGEN is also still down 17% from its pre-pandemic all time high. So is this a stock that has a good buying opportunity, we will found out in this post!
To start with, when we look at LGEN we need to dive deep into its fundamentals. To do this we will look into their 2020 year end report.
|Net Profit Margin 2020||8.93%|
|Net Profit Margin 2016||7.03%|
|Free Cash Flow 2020||£3.84bn|
|Free Cash Flow 2016||£5.55bn|
|Price / Free Cash Flow||4.07|
First thoughts when looking at the fundamentals above? Revenue has grown, along with profit margins. However free cash flow has dropped, but that could probably be attributed to the pandemic which would not concern me too much; this is something to keep an eye on in 2021.
Currently, LGEN is trading at very low multiples, a P/E of 9.92 and P/FCF of 4.07. This is something good to see if you are a value investor. When compared to the FTSE 100 average of 21.28. Aviva (AV), LGEN’s closest rival is currently trading at a P/E of 8.14, while lower it is not significant to warrant much concern.
At such a low price to free cash flow, LGEN is very attractive; even more so when you factor in its dividend. In 2020 LGEN paid out a total of £1.8bn in dividends giving a dividend per share of 17.57p, this is a yield of 6.66% on current share price. LGEN was able to maintain its 2020 dividend at 2019 levels which is a significant achievement as nearly all financial services and banking companies paused dividends. When compared to free cash flow, the current payout ratio stands at 46.8%. This is a safe dividend, even more so when you consider free cash flow dipped as a result of the pandemic. I don’t know many companies with such a high dividend yield that is so safe.
Below you can see the share price graphs for LGEN at year to date, and 5 year time frames:
Year to date LGEN is up only 0.96%, but this is after a 10% pull back since April. While on the 5 year graph you will see a healthy 23.28% return. Both of these returns do not factor in dividends, which if you did on current yield you could add on the compounding effect of 6.66%.
In general the insurance industry has been on a pull back since April this year, not just LGEN. Many commentators have put the pull back down to the government loosening Covid restrictions, this has made many in the financial services industry nervous. With the removal of restrictions the chance of things going wrong has increased. This increase in risk means an increased risk in liabilities to insurers.
Additionally, the long term outlook of the UK economy is looking a little fragile, something investors are not really concentrating on much at the moment. Companies such as LGEN will move similar to the prospects of the wider economy.
Final thoughts and valuation
The bottom line when it comes to LGEN is that it has shown to be a reliable dividend payer which can also offer share price growth to investors. It offers a very good dividend yield which is more than covered by free cash flow.
With its recent pull back I would say that LGEN is currently at a good buying opportunity. Assigning value to LGEN, however is a difficult task. Simply Wall Street has valued LGEN at £6.71 per share, this would represent an upside of 60%. Given that LGEN has always traded on low multiples over the last 5 years and often goes up and down in tandem with the UK economy I would like to see a price target of £3.50 within the next 12 months.
None of the content in this article should be considered financial advice, I am not a financial adviser and you should always do your own research prior to investing. These are my opinions only.