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Does Legal and General's [LGEN] share price represent value plus an attractive dividend?

After reaching a three year high of 286.2p in May 2018, bar a brief surge in early October, FTSE 100 listed Legal and General [LGEN] spent the remaining of the year losing pace, closing the year 17% off that high. 

Like most UK firms, Brexit uncertainty weighed heavy on the financial services company which specialises in insurance, pensions and investment management. Ending the full year down by just 6% however, it did outperform the UK banks, which all lost 15-25% through the year, as well as the FTSE 100 index which closed 2018 down 14%.Powered by CMC Markets, as at 16 January 2019

 

Now, many analysts are expecting big things from the firm’s share price performance in 2019. Deutsche Bank upgraded Legal and General’s stock to a buy on 7 January, setting a price target of 290p. The stock has gained 6.5% since the markets opened in January and is currently sitting at around the 245p mark. 

Others bullish on the stock include Ian Forrest, investment research analyst at The Share Centre, who pegged Legal and General as his ‘stock of the week’ on 7 January. “It’s a buy for us,” he says. “The yield is the most attractive thing. When you look at the forecasts for the company, it suggests dividends are likely to rise.”

 

Attractive dividend 

Indeed, the company has an attractive forward dividend yield of 6.5%, which is forecast to rise to as much as 7.8% in 2019, with the company expecting to pay out £600m to shareholders this year, up from £500m in 2018.  

Forrest adds that the firm is well positioned to “benefit from an increasing demand for pensions, protection and savings plans as reliance on the state in years to come remains questionable”.

He adds: “Key long term factors driving the business forward are an ageing society, globalisation of asset markets, welfare reform and the adoption of digital platforms. These should be unaffected by Brexit.”

“Key long term factors driving the business forward are an ageing society, globalisation of asset markets, welfare reform and the adoption of digital platforms. These should be unaffected by Brexit.” - Ian Forrest, investment research analyst at The Share Centre

Furthermore, the stock price looks to be good value with a forward P/E ratio of 7.85%, illustrating the strong financial state the company is in. The firm has an operating cash flow of £5.9bn and a balance sheet of £20.2bn. 

In a moderate show of confidence, Legal and General Chairman John Kingman meanwhile purchased 714 shares in the company at the start of the year, adding to 1399 shares purchased in December. 

 

Operating profit H1 2018, YoY % change+7%
Market cap£15.07bn
PE Ratio (TTM)8.81
EPS (TTM)28.80

LGEN stock vitals, Yahoo finance, as at 16 January 2019

 

JPMorgan Chase: “underweight”

Not everyone shares this positive outlook however. JPMorgan Chase cut its price target for the finance firm from 258p to 239p on 8 January, rating the stock underweight. 

And for the first half of 2018, the company’s profit after tax was down year-on-year by 19%, falling from £952m to £772m, with earnings per share falling from 15.9p to 13p comparatively between the two six month periods. 

Gross profits from the company’s six divisions did however grow a total of 7%, reaching £1.5bn for the half-year period. There was growth across five of the divisions, with the largest jump in profits – 21% – coming from the firm’s capital division. 

21%

H1 2018 LGEN Capital division proft increase on a YoY basis

Further growth from the company’s divisions is expected to be reported for the second half of 2018, particularly for its institutional retirement fund. 

“We expect to have an exceptionally busy H2. We are currently actively quoting on over £20bn of UK pension risk transfer deals, including over £7bn of transactions in exclusive negotiations expected to close in H2,” Nigel Wilson, Group Chief Executive said in a statement accompanying the earnings release.

“LGIM’s momentum continues as it expands in the United States and extends its global footprint in Asia. LGC is accelerating UK investment through its “Changing Britain” programme which reflects growing regional devolution. We are confident that Legal & General is strongly positioned for growth in H2 and beyond."

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