I last wrote about FTSE 100 life assurance, investment management and general insurance provider Legal & General (LSE: LGEN) around a year ago when the share price stood at 277p. Today, it’s at 268p after a full year of operational progress. Is this stock now a bargain?
Ready to withstand a downturn
I can’t find a direct mention of the potential effects on operations of the COVID-19 coronavirus outbreak in today’s full-year results report. However, in the outlook statement, the company said it has “confidence” in its capacity for future growth and paying shareholder dividends. Indeed, the firm claims to have a “strong” balance sheet, with £7.3bn in surplus regulatory capital, and “significant buffers to absorb a market downturn.”
But I’m not kidding myself that a general macro-economic downturn will leave the stock unscathed. There’s a high level of cyclicality in the business and the shares have been essentially moving sideways for the past five years, despite steady advances in earnings and the shareholder dividend. In many ways, the stock has been behaving like big London-listed bank shares.
Indeed, between the spring of 2007 and early 2009, the share price crashed by around 80% in the wake of the credit crunch and the great recession that followed. In that respect, it again reminds me of the banks.
Transforming and growing
But as well as being cyclical, Legal & General has been growing its business. The narrative in the report explains that over “the past several years”, Legal & General has become a “high growth/high return” business when it used to be a “lower growth/lower return” outfit.
The directors reckon they achieved the change in two ways. Firstly, by focusing on large markets where the company has a small market share and where it can outpace market growth. And secondly, by targeting growth markets where it already enjoyed a leading market share and where it can grow by maintaining its leadership.
On top of that, LGEN has sold businesses that were either sub-scale or in geographies where it was unlikely to achieve financial success. The deals generated a handy £1.5bn of proceeds, which the directors reinvested to fund “future profitable growth.”
Strong figures
And I really can’t argue with today’s figures. Earnings per share rose by 16% compared to the previous year and the directors slapped 7% on the total dividend. They said in the report they took into account the sustainability of the dividend “across a wide range of economic scenarios” and while considering the firm’s anticipated financial performance.
It seems the top management team has confidence in the outlook, despite recent macro-economic challenges. And the dividend progression policy looks set to continue. Over five years, the shareholder payment has increased by just over 50%. And today, with the share price near 268p, the forward-looking yield for 2020 is around 7%. If that’s a warning, it’s not worrying the directors, it seems!