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Legal & General (LSE:LGEN) shares offer one of the highest dividend yields in the FTSE 100 index. Currently, the yield outlook here is around 7.5%.
Is the stock worth buying for this huge dividend yield? Let’s have a look.
Does L&G pay dividends?
A high yield can sometimes be a trap. Often, it’s because something is wrong with the company.
And what has happened is that the ‘smart money’ has dumped stocks, reducing share prices and raising dividends, temporarily. The company then cuts its dividend, and returns it. We see this sequence play out all the time.
However, looking at Legal & General, I’m not sure there is anything wrong with the company.
Of course, there was some uncertainty a few months ago, during that mini-budget crisis. This event resulted in the client selling higher cost products to meet the demand for collateral.
However, it said in November it would only affect 2022 profits by around £10m. It also said that expectations for the overall year of profit and capital generation remain unchanged.
Going forward, the FTSE 100 company looks good for growth. Legal & General is a major player in the bulk annuity space (this is an insurance policy bought with a defined benefit pension scheme to reduce risk) and 2023 is expected to be one of the biggest years on record for this type of insurance.
Meanwhile, in the long term, the firm – which has built a formidable investment management business in recent years – should benefit as global equity markets rise.
So, overall, there’s a lot to be optimistic about here.
Dividend track record
Expanding the dividend, this is expected to be well covered in the near term.
For 2022, analysts expect Legal & General to pay 19.4p per share on earnings per share (EPS) of 34.2p. That equates to a dividend coverage of about 1.8 times.
And for 2023, analysts expect a payout of 20.5p per share on EPS of 34.5p. That gives a dividend coverage of about 1.7 times. In general, a dividend coverage ratio close to two indicates a low likelihood of dividend cuts.
It is worth noting that Legal & General has made a good record of dividend growth recently. The company has not issued a dividend since the Global Financial Crisis of 2008/2009. And over the last decade, has increased its payment significantly.
This gives confidence that the dividend is safe in the medium term (although there are no guarantees).
Interesting evaluation
As for the value, the stock seems to offer some value right now. As analysts forecast EPS of 34.5p for 2023, the expected price-to-earnings (P/E) ratio is less than eight. This is a lot you don’t want.
This combination of low cost and high yield seems quite compelling, to my mind.
Of course, there are risks to consider. One of them is stock price volatility. Legal & Common stocks have a ‘beta’ of around 1.7. This means they are around 1.7 times as volatile as the wider UK market. In other words, if the UK market falls by 10%, its shares will fall by around 17%.
Overall, I believe the stock currently offers an attractive risk/reward proposition.
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