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The outlook for the UK economy this year remains bleak. This prevents groups FTSE 100 stocks that are considered overexposed to the struggling British economy. However, I think the long-term prospects for one dividend stock are being overlooked. This is why.
Stock is underappreciated
The latest forecast from the EY ITEM Club, a UK economic forecasting group, says the UK’s recession will be deeper – but not longer – than previously expected. Then the economy will grow again from mid-2023.
As a long-term investor, this doesn’t bother me. But it appears the financial services giant Legal & General (LSE: LGEN) has been destroyed by all the negativity of this headline. Although the FTSE 100 has risen 6% over the past year, L&G shares have fallen 7%.
Like a domestic bank Lloyds, L&G has been integrated into the wider UK economy. Which is understandable because so much of the UK economy is concerned with pensions and insurance. But that’s only part of the story.
LGIM, its investment management arm, is one of the largest in the world and the second largest in Europe. It has assets under management of $1.6trn, as of June 2022. It is a major global investor, with interests in the US, China, and Japan.
In addition, half of L&G’s pension assets are international. In terms of insurance, it provides more coverage in the fast growing Indian market. In addition, it expanded significantly into the US for the first time, which created a major science and technology platform called Ancora L&G.
I expect this geographic expansion to provide growth opportunities in the coming year. And as the population ages in the primary market, a variety of pension and annuity products may be in demand.
massive yield
The company’s most recent H1 results, announced in August, were solid. This increases operating profit, profit, solvency ratio, and increases dividends.
But the stock still looks cheap, with a price-to-earnings (P/E) ratio of 7.5. The dividend yield for 2023 is 8%.
Of course, this large yield may indicate that the company can reduce its payout. However, the fact that the dividend is covered 1.8 times by earnings gives us confidence that it is currently safe.
The company has a decades-long track record of increasing dividends. It’s basically a dividend machine, perfect for generating passive income.
Risk
The diverse size of L&G’s operations and increasing global presence exposes various risks. We see in 2021 how China’s property market is under severe financial stress. Although not affected by this black swan, it shows how companies can find similar in the visible international market.
However, L&G’s vast experience and pedigree in assessing these risks and complexities put me at ease. There were no defaults in the annuity portfolio during the first half of last year. And receive 100% of the scheduled cash flow from direct investment. This is a well run business.
The stock is 260p today, which is the same price in 2018. I plan to increase my holding very soon.
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