Legal & General (LGEN) announced their final results today (click image above for full details at their investor relations) which seemed to be broadly in line with forecasts. I say broadly in line as the earnings looked slightly light, but that is not so important with this one as it is mostly about the dividend. On that front the 19% increase to 13.4p was in line with forecasts and marks the last year of bumper dividend growth as they finish running the dividend cover down to a lowish 1.4x for a 5.8% yield.
Going forward they talk about pursuing a progressive policy which presumably means more in line with earnings growth assuming they manage to deliver growth. Their future growth rest on five spokes to their umbrella as it were which they highlight as being ageing populations (pensions, annuities and equity release), globalisation of asset markets (L&G is 15th largest in world with 1% market share), creating real assets (infrastructure and housing), welfare reform (DC Pensions) and digital (servicing and cost reduction).
Current forecasts seem to indicate an expectations for 6 to 7% growth in both the earnings and dividends. Based on this mornings share prices which seems underwhelmed by these results and is therefore down by 5% to 232p leaves them on a yield of 6.1% for the coming year, assuming those forecasts are not downgraded. It doesn't look like that will be the case to me as they said for 2016 that they expect to deliver a further increase in operational cash generation of 6-7% across the areas that they provide guidance for: LGR, LGA, LGC, Savings and Insurance excluding General Insurance. I also read a report that UBS are suggesting that they now see 6% dividend growth between 2016 and 2019.
Summary & Conclusion
An in line set of results from L&G with the last in a line of bumper dividend increases as they finish running down their dividend cover. Given the outlook for continued 6 to 7% growth, the fall in the share price this morning leaves them looking attractive on a 6%+ yield which should in the absence of a de-rating provide potential for a double digit total return in the next twelve months which seems like a reasonable return for the risk here.
The contrary view and the scope for a de-rating would rest on a rout in bond and equity markets which they and their businesses are exposed to (as evidenced by the collapse in the share price this year shown in the chart below). The fall in share price this morning seems to tie into this as apparently according to some reports I have seen suggests that some analysts are flagging that their capital position is somewhat weaker than other UK competitors, although they describe their model as capital light.
As ever you pay your money and take your choice, but I am happy to choose this one as part of a broadly diversified income portfolio. If you agree with the sentiment it might be worth putting on your watch list in case we do get another bout of market weakness before they go XD the final (9.95p / 4.3%) on 28th April 2016.