Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) is among the insurance companies that managed to keep its dividend going right through the recession, while a couple of its rivals were forced to slash theirs. In fact, not only was the annual payout maintained, but it was hiked handsomely each year.
But what does 2014 have in store?
Let’s start with a look at the past five years, together with the latest consensus:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | -17.88p | n/a | n/a | 4.06p | — | 5.3% |  -4.4x |
| 2009 | 14.82p | n/a | 5.4 | 3.84p | -5.4% | 4.8% | 3.9x |
| 2010 | 14.07p | -5% | 6.9 | 4.75p | +24% | 4.9% | 3.0x |
| 2011 | 12.42p | -12% | 8.3 | 6.40p | +35% | 6.2% | 1.9x |
| 2012 | 13.90p | +12% | 10.5 | 7.65p | +20% | 5.3% | 1.8x |
| 2013* | 15.63p | +12% | 13.8 | 9.27p | +21% | 4.3% | 1.7x |
| 2014* | 16.94p | +8% | 12.7 | 10.65p | +15% | 4.9% | 1.6x |
| 2015* | 18.32p | +8% | 11.8 | 11.78p | +11% | 5.5% | 1.6x |
* forecast
What a bargain that was!
Firstly, did you buy any at the end of 2009 when the shares were priced at around 80p and on a stupidly low price-to-earnings (P/E) ratio of just 5.4? You didn’t? Me neither. But those who did have since seen their shares soar 170% in value to 216p today, and they’ve had those lovely dividends rolling in too.
Now, let me offer a note of caution — those dividends are looking a bit overstretched to me. Aviva was forced to slash its dividend in 2012 and bring it down to more sustainable levels, and its 2013 dividend looks set to be covered around three times by earnings.
At just 1.7 times, I’d say Legal & General’s expected cover is looking a bit fragile. At the very least, I’d prefer to see cover being maintained and the dividend rising no faster than earnings — at least until the economic recovery is looking a bit stronger.
Board optimism
But Legal & General’s board appear to think that the company is heading for lucrative times and that continuing to boost the dividend ahead of earnings is justified. Are they right?
Well, at Q3 time reported in November, we heard that year-to-date net cash generation was up 20% to £740m, with year-to-date gross inflows up 65% to £42.1bn. Total assets under management came to £443bn.
And at the first-half stage earlier in the year, Legal & General had already bumped up its interim dividend by 22% to 2.4p, saying the decision was backed by “the Board’s confidence in the strength of Legal & General’s financial performance“. And judging by forecasts for 2014 and beyond, that bullishness is probably here to stay.
Looking good
Barring unforeseen disasters (and providing my niggling concerns over the relatively weak dividend cover prove unfounded, at least in the short term), we should be looking at a healthy earnings rise in 2014 together with an even nicer dividend rise. And with a year-end P/E of under 13 and dropping to less than 12 by the end of 2015, I can see the share price gaining a bit more this year too.
Verdict: Everything up in 2014!