Is Legal & General a Smart Dividend Investment? Analyzing Its 9.1% Yield

Investors often seek out dividend stocks to secure a steady income. However, the adage “a bird in the hand is worth two in the bush” rings particularly true in this context—especially when considering that dividends are never guaranteed. While a robust dividend yield can be enticing, it’s essential to shift focus toward a company’s long-term commercial prospects as well as its potential for dividend sustainability. Today, we’ll dive into Legal & General (LSE: LGEN), a blue-chip company currently offering a striking 9.1% dividend yield.

Understanding Legal & General’s Dividend Appeal

Legal & General, a significant player in the FTSE 100, has consistently increased its payouts since the financial crisis of 2008, with only one exception. This impressive track record naturally attracts investors eager for dividends. However, while the current yield may appear appealing, it is vital to assess the underlying factors influencing both the share price performance and future growth.

Assessing Share Price Performance

Although Legal & General boasts a 9.1% dividend yield, its share price has not experienced comparable growth. Over the past five years, the stock has gained only 20%, which pales in comparison to the FTSE 100 index’s overall increase of 61% during the same timeframe. It is crucial to consider whether past performance may indicate future challenges, especially in light of the company’s recent business decisions.

Strategic Business Moves

The company recently announced plans to divest a substantial portion of its U.S. operations. While this move could provide a temporary cash boost for dividends and share buybacks, it poses uncertainties regarding revenue streams in the long run. Legal & General’s recent financial performance has raised additional concerns; net profit fell almost 60% to £191 million last year, following declines of 42% and 62% in the previous years. This stark contrast to a net profit exceeding £2 billion in 2021 creates an image of volatility.

Focusing on Cash Generation

Despite fluctuations in reported earnings, Legal & General’s cash generation capability remains relatively strong. For instance, the company’s capital generation improved 3% year-on-year to £729 million in the first half of this year, using Solvency II standards. This performance underscores that cash flow might be more stable than net profits suggest, and is a critical factor when considering dividend sustainability.

Long-Term Growth Prospects

The company’s large customer base and extensive experience in the financial sector could foster future expansion, particularly in retirement-linked products. However, a recent strategy adjustment, which lowered the targeted annual dividend growth from 5% to 2%, might be a reason for the company’s underperformance compared to the broader FTSE 100.

Risks Ahead

Despite these growth prospects, investors should be aware of the inherent risks. Financial market volatility can compel policyholders to withdraw funds more frequently, further impacting revenue and dividends. This unpredictability underlines the fact that no dividend is ever guaranteed.

Conclusion: Is Legal & General Worth It?

In summary, while Legal & General presents a compelling dividend yield of 9.1%, investors should take a holistic view. The company is well-managed and exhibits strong cash generation potential, but its recent financial performance casts a shadow on its growth trajectory.

Key Considerations for Investors

• High Dividend Yield: Attractive 9.1%, but with uncertainties in revenue.
• Mixed Share Performance: Lagging compared to the broader market, raising questions about future performance.
• Cash Generation: Better cash flow stability compared to reported earnings.
• Growth Risks: A revised dividend growth strategy and market volatility may pose challenges.

Given these factors, Legal & General could still be a solid addition for dividend-focused investors, provided they are aware of the potential risks. As always, due diligence remains essential.

While the investment landscape is ever-changing, understanding the various dimensions of a company’s performance is key to making informed decisions. For updates on dividend opportunities and investment strategies, stay tuned for more insights.

The content herein represents the author’s personal views and does not reflect the opinions of The Motley Fool UK or its any affiliated entities. Always consult with a financial advisor before making investment decisions.