Legal & General (LSE: LGEN) has been a good investment over the past five years, gaining 26%. But that’s mostly down to the stock’s performance prior to Covid-19. Since the pandemic kicked in, the LGEN share price is down 18%.
That includes a relatively disappointing 2021 so far. After a reasonably promising start to the year, the wheels have come off a bit, with the shares down 2.5% year-to-date. I’ve always invested in the insurance sector, and I’ve held Legal & General in the past. And I’m seriously thinking of going for LGEN again in August, to keep my Aviva shares company.
While weakness in the financial sector might be understandable at the moment, Legal & General’s business looks surprisingly strong to me. My Motley Fool colleague Stuart Blair has looked at how well the company’s 2020 results turned out. Though bottom-line pre-tax profit fell 12%, operating profit came in broadly unchanged from 2019. I reckon that’s an impressive achievement.
Healthy liquidity
As Stuart also pointed out, the firm’s liquidity looks strong. The dividend is the icing on the cake, though, maintained at the same 17.57p as in 2019. And I can see the company at least holding it for the current year. On the current LGEN share price, it would yield 6.7%.
I’d need to think about how well that’s likely to be covered, as it was a bit thin in 2020. But we should hopefully get some update on that before too long, with first-half results due on 4 August.
The reason for the slide?
So why have the shares been sliding since reaching a 2021 peak in April? Well, the government has moved ahead with its plans to abandon coronavirus restrictions, and that’s causing nervousness in the whole investment business. But it’s more specific than that. With a return to a free-for-all, where we can go where we please and do whatever we want, the risks of things going wrong have been increased. And an increase in risk means an increase in potential liabilities for insurers.
On top of that, I think the focus on Covid-19 has led a lot of investors to take their eyes off what really matters in the long term. That’s the UK economy. Just vaccinating everyone is not enough. No, looking past the pandemic exposes our underlying economic outlook. And that appears just a bit fragile, with the super recovery that many seemed to assume would happen looking increasingly unlikely.
Not just the LGEN share price
Saying all that, I think we’re seeing an over-reaction in the opposite direction now. The LGEN share price is not the only one that has been dipping. No, Aviva, Prudential, and the whole FTSE 100 insurance sector is falling back. I reckon the insurance sell-off is overdone.
In any case, those of us who invest in insurance companies come to expect this kind of volatility. Yes, there is genuine economic risk ahead. But I’ve added Legal & General to my list of buy candidates for August.