City analyst explains L&G ‘buy’ rating

Income investors kept Legal & General Group (LSE:LGEN) in their sights today as another big City firm backed the group’s long-term strategy in the wake of a punishing week for the shares.

Supported by a projection for an 11% total distribution yield in 2025, Deutsche Bank said today it saw no reason to change its “Buy” recommendation on the FTSE 100 stalwart.

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It’s a view shared by retail investors as the company again topped interactive investor’s list of most traded stocks, with 90% of this morning’s activity being “Buy” orders.

This surge in demand has been consistent over the past four sessions after new L&G boss Antonio Simoes tempered some of the City’s loftier expectations.

The shares fell by more than 5% on the day of his much-anticipated strategy presentation, which included plans for £200 million a year of share buybacks and 2% dividend growth starting from next year.

This updates the previous dividend policy of 5% under predecessor Nigel Wilson, who spurned buybacks in favour of investment.

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Simoes told City analysts that the combination of dividends and share buybacks meant the company intended to distribute more than what it would've otherwise with 5%.

His updated earnings guidance last Wednesday also underwhelmed, prompting Deutsche Bank to lower its per share forecasts by about 6% in today’s note.

However, the City firm believes the new estimates are more realistic and likely to be conservative looking out to the future. The guidance leads to the bank’s new price target of 275p, down from 300p previously but a jump of 21% from today’s level of 226p.

Other changes revealed by Simoes include the consolidation of four divisions into three via the creation of a new Asset Management unit. He has also split out housebuilder Cala and other non-strategic assets with a view to these being managed for value.

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The strategy is underpinned by L&G’s plan to write £50-65 billion in pension risk transfer business in the UK by year-end 2028, which should increase the store of future profit and generate permanent capital to catalyse asset management growth.

Targets in asset management include cumulative annualised net new revenues of £100-150 million between 2025-28. In the third unit of retail, the company is aiming for £40-50 billion of cumulative net flows as a leading provider of workplace pensions.

Bank of America upgraded to a “Buy” recommendation on Thursday and said that short-term pain should lead to long-term gain.

It said the investment decisions being taken now at the expense of near-term payouts were likely to lead to cash generation ramping up in the outer years of forecasts. For 2024, it highlighted a 9.3% forecast dividend yield after L&G pledged to grow this year’s payout by 5% before switching to the new rate of 2% up to 2027.

The bank, which has a price target of 268p, said: “We think L&G made the right decisions for the long term, even though this led to short-term disappointment at its capital markets day.”