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At Legal & General (LSE:LGEN) share price fell 8% in March amid more selling FTSE 100 sharing. I believe this cements its position as one of London’s best value stocks to buy.
Today, the blue-chip insurer trades at a forward price-to-earnings (P/E) ratio of 7.2 times. This is lower than the average of 14.5 times for the FTSE index. It also makes the business cheaper than its main competitors Aviva.
Legal & Common stocks also offer good value when it comes to dividends. The 8.4% yield for 2023 dwarfs the 3.6% average for FTSE 100 stocks.
Big risk
I don’t think the low cost of the insurance company is a fair reflection of the risk and reward profile of the company. However, investors should be aware of some important hurdles that companies have to overcome in order to generate decent profits.
The saturated market is one reason why L&G shares – like many of its rivals – are trading cheap. There are many competitors like Aviva, Ax, Prudential, MetLife and RSA Insurance which FTSE companies have to contend with.
Like any company facing big competition, L&G needs to keep its prices low to prevent customers from joining its competitors. However, even these profit-suppressing actions are not always enough to prevent market share erosion.
The bleak economic outlook is another reason why the company’s stock is trading at a low P/E ratio. Unlike general insurance, demand for life insurance tends to drop when consumers feel the pinch.
City analysts think Legal & General’s profits will fall 12% in 2023 as the global economy cools. Things could be very difficult if economic growth is sustained.
Great potential
But I still believe that the potential rewards of having life insurance outweigh the risks. I take a long-term view when it comes to buying shares. And I believe the outlook here remains solid.
First, the company has good earnings potential due to key demographic trends. For example, the rapid growth of the elderly population is driving demand for annuities, pensions and other financial products. This very important trend for L&G looks set to run for decades.
The World Health Organization estimates that the number of people aged 60 and over will more than double between 2015 and 2050. It will then reach 22% of the global population.
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I am also excited by Legal & General’s overseas expansion to boost profits and, more specifically, in North America.
Last fall, the company invested $500m to create a real estate platform for the science, research and technology industry. This may be the first of many such international investments.
I was also attracted by the strong Legal & General balance sheet. It had a Solvency II cover of 240% in March, more than twice the regulatory requirement. This should provide a foundation for income-enhancing investments and big dividends for years to come.
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