Legal & General is now the fifth highest-yielding stock in the FTSE 100, having dutifully paid dividends for more than two decades and cut payouts just once in the wake of the 2008-2009 financial crisis.
The insurance giant is among the best income stocks in London, with a return that has averaged 4.9 percentage points higher than a five-year government bond over the past three years. However, the shares have lost their luster and are down about 9 percent this year as some investors have clamored for share buybacks, a simpler business model and improved investment management services.
Antonio Simoes, 49, a former banker with no previous insurance experience who took over as CEO early this year, promised he would develop a ‘simpler investment scenario’ for Legal & General: a tall order, as equities have developed into a complex game for most investors in terms of interest rates, the health of the stock market, the economy and the housing market, as well as the core activities in the field of pensions and investments.
The company makes its money from four major divisions. Legal & General Capital, which specializes in private assets and infrastructure, Retirement Institutional, which focuses on defined benefit pensions, Retail, where it manages workplace retirement savings, and Investment Management. Overall, the group, which traces its origins back to 1836, has grown into an efficient business, with a return on equity averaging 15 percent over the past three years. The solvency coverage ratio, a measure of financial strength, has remained above 200 percent for the past two years.
Simoes’ new business plan, unveiled last week, seemed to tick some of the right boxes. The company announced a £200 million buyback, its first since 2007. It will combine its investment management and Legal & General Capital divisions to form a new asset manager for the public and private markets. There was no real update on the possible sale of his Cala home building business, although management said it was open to either possibility of its “sale or retention”.
This is ostensibly exactly what many investors were pushing the company for, yet shares fell as much as 3 percent that day despite a new target for operating earnings per share growth of 6 to 9 percent. The real source of the disappointment was its much weaker capital return targets: while management said it expected dividends to grow by 5 percent in the 2024 financial year, it plans to grow cash payouts by just 2 percent in the coming years. percent increase. until 2027. This is disappointing since a rate of 7 percent was more common until 2019.
Legal & General shares have fallen by just under a tenth since this column last rated them a buy about three months ago, citing the arrival of the new CEO and a higher interest rate environment that could help the stock recover to their peak. from 313p before the pandemic. We pointed out that even if this didn’t work out, shareholders would at least be able to enjoy the dividend.
The hit to dividend growth may seem painful, but shareholders will ultimately be able to rely on the ease of the buyback. The payouts, plus the buybacks, imply double-digit total capital returns through at least 2028, equivalent to more than half of the current market capitalization, according to Bank of America analyst estimates. While Legal & General shares can be volatile, there are few companies in London that can reliably offer this level of cash returns.
The simplification of operations is to be welcomed and the buyback may be welcomed by many, although given the resulting reduction in dividend growth it appears to be a capital allocation adjustment rather than a meaningful increase in the cash returned to shareholders. Still, it remains a reliable choice for investors looking to Legal & General for income.
Advice To buy
Why Very strong cash potential for those looking for income
TwentyFour Income Fund
There are only a handful of stocks in the FTSE 100 with a dividend yield close to double figures, but the FTSE 250 has more to offer with its many investment funds. The TwentyFour Income Fund is among the highest, with a return of 9.7 percent.
This reflects a riskier approach than some of the more traditional income-oriented funds on the market. The trust invests in less liquid, higher yielding UK and European asset-backed securities, the majority of which have variable interest rates, which has benefited shareholders as interest rates have risen.
Asset-backed securities differ from conventional bonds, such as government or corporate bonds, because they are backed by a diversified pool of other loans with similar characteristics. Just under half of the portfolio consists of RMBS, or residential mortgage-backed securities. The second largest allocation concerns CLO, or collateralized loan obligations. About two-thirds of debt matures within one to three years and a quarter within three to five years. Just under half of the debt in the portfolio has a credit rating of B or BB.
The managers’ official target is to pay a dividend of at least 8p per share each year, and a net total return of 6p to 9p per year. The trust is not cheap, with a management fee of 0.75 percent of the lower of the net asset value of the market capitalization. You could argue that this is justified, as relatively little research has been done into the area in which managers operate.
The shares are currently trading at a 6 percent discount to their net asset value, although TwentyFour Income’s yield alone could be enough to attract some investors. However, investors should note that the fund has only returned a cumulative net asset value per share of 7.6 percent, including dividends, since its 2013 launch in late April, which seems relatively modest.
Given the complexity of the portfolio, not to mention the lack of a benchmark index for the fund, a very healthy dose of caution is required.
Advice Delay
Why High yield reflects a risky, complex portfolio