ii view: Covid claims hurt L&G but dividend is attractive

Covid has hurt, but exposure to pensions and a 6% plus dividend yield is attractive. Buy, sell or hold?

Full-year results to 31 December 2020

Chief executive Nigel Wilson said:

"Legal & General delivered a robust and resilient performance for all stakeholders, providing stability to our people, customers and shareholders.  Our balance sheet remains strong, with the Solvency II coverage ratio currently over 190%, and trading remains consistent with delivering our growth ambitions which are supported by six long term growth drivers.  Our commitment to Inclusive Capitalism, ESG and investing in climate change means we intend to play an important role in the post pandemic recovery."

ii round-up:

Pensions and insurance company Legal & General (LSE:LGEN) today reported full-year profit dragged lower by the global pandemic. 

Profit fell by 3% to £2.2 billion as increased death claims and provisions, and disruption caused to housing related investments both fed into a £228 million pandemic estimated hit to earnings. 

L&G shares drifted marginally lower in UK trading, having risen by around a quarter over the last year. Shares for rival Aviva (LSE:AV.) are up by a similar amount, while shares for Asia-focused Prudential (LSE:PRU) have gained around 40%. 

Reduced profit for two of L&G’s divisions were partly countered by profit gains for its core retirement or pensions related businesses – both corporate and individual retail – and for its asset management division. 

The rising cost of providing staff pensions has also seen many companies closing and then offloading their obligations via bulk purchase annuities to outside entries such as L&G. Profit for its institutional and retail retirement businesses rose by 10% to £1.2 billion and 9% to £325 million. 

The corporate or institutional retirement division is by far its largest. Generating just over half of overall group profit. Assets under management for its asset or investment management division rose by 7% to £1.28 billion.

L&G Capital, which includes housebuilder CALA Homes, reported a near one quarter drop in profit to £275 million, hit by pandemic related disruption to construction. 

Increased Covid related claims and life provisions resulted in a 40% profit fall to £189 million for its UK and US insurance business. 

The total dividend for the year was left unchanged at 17.57p per share. Accompanying management outlook comments pointed to remaining near-term challenges over 2021, but an intension to be a leader in the post-pandemic economic recovery.

ii view:

Legal & General is primarily a global provider of retirement solutions to corporates and individuals. Its strategy is to remain a leader in the global retirement solutions and insurance markets. L&G’s lists its six growth drivers as ageing demographics, globalisation of asset markets, investing in the real economy, welfare reforms, technological innovation and addressing climate change. 

L&G's core institutional retirement division focuses on corporate defined pension plans in the UK, the US, the Netherlands, Ireland, and Canada, which together have nearly £7 trillion of pension liabilities due to ageing demographics. Its retail retirement business focuses on the UK, where currently, each year, there are £40 billion of personal pension assets coming to maturity. Which is expected to grow to £50 billion by 2024. The group’s capital division has targets including delivering 3,000 affordable homes per year by 2023. 

For investors, ongoing pandemic uncertainty cannot be ignored. Competition in the asset management business also remains intense, while L&G’s exposure to housing has been underlined by these latest results. That said, exposure to ageing demographics and pension provision remains core, while L&G’s income generating ability remains evident in a historic and forecast dividend yield of over 6%. In all, while the shares may be up with events given the share price’s proximity to the current fair value analyst estimate of 284p, income seekers are likely to stay put.   

Positives: 

• Diversity of both product and geographical location
• Attractive dividend payment (not guaranteed)

Negatives:

• Direct investments such as property take time to sell
• The dividend is unchanged compared to a 7% increase for 2019

The average rating of stock market analysts:

Strong hold