Legal & General (LSE: LGEN) has struck me in recent years as a high-yield stock more sinned against than sinning. It is not the UK financial services provider’s fault that the country left the European Union, rightly or wrongly. Or that this put many British financial stocks at a valuation discount to their European peers.
It is not its fault either that an obscure US bank failed in March. Or that this raised fears of a new banking crisis, which prompted a sell-off of many financial sector stocks.
And yet, Legal & General’s share price has suffered and is down 15% from its March high this year. Perhaps, though, the arrival of a new CEO in January will start to redress this pricing anomaly.
Core businesses are sound
For me, as a long-term shareholder in the company, there is nothing fundamentally wrong with it.
From the start of its five-year plan in 2020 to the end of 2022, it has achieved £5.1bn of cash generation and £4.9bn of cumulative capital generation. It stated in its 2022 results that even zero growth in both metrics from now to 2024 would allow it to generate £8bn-£9bn in cumulative cash and capital.
Another sign of balance sheet strength is the company’s Solvency II ratio rising to 236% in 2022, from 187% in 2021.
It is a leader in the UK Pension Risk Transfer (PRT) market, in which companies outsource their pension commitments. And it is in the Top 10 in the US PRT market as well.
Legal & General Investment Management also remains a leading global asset manager. It is ranked 11th in the world, with £1.2trn of assets under management.
On top of these positives, Legal & General is still a star dividend stock in the FTSE 100. Its dividend yield in 2022 was 7.8%, in 2021 it was 6.2%, and in 2020 it was 6.6%. In 2019 and 2018 these payouts were 5.8% and 7.1%, respectively.
So what will the new CEO do?
New CEO António Simões has not said what he intends to do when he takes over in January. He was Banco Santander’s regional head of Europe, so presumably will bring much of that experience to his new firm. This will contrast with his predecessor, Nigel Wilson, a highly vocal advocate for Brexit.
Whether this can begin to redress Legal & General’s share price discount to its European peers remains to be seen. Currently, it trades at a price of around seven times the next 12 months’ earnings. This compares to an average of around nine times for similar companies in the European Union.
There are many rumours about what Simões might do. These include targeting asset management growth in the US and reducing the reliance on the PRT business. It seems to me, though, that until further details are forthcoming on the new CEO’s plans, these rumours are worthless.
There are risks for me in the share price, of course. The company is not immune to broader market risk, as we saw in March. However, the company’s very high Solvency II ratio and extremely sound fundamentals offer considerable protection, in my view.
I already have positions in the stock. But if I did not, then I would buy the shares right now without any hesitation.
