ii view: L&G strategy and share buyback disappoint

Refreshed strategy and financial targets

• Current four divisions to become three 
• A £200 million share buyback for 2024 and further similar annual buybacks thereafter
• Continues to expect a 5% increase to the 2024 total dividend
• Planning 2% annual dividend increases for 2025, 2026 and 2027 

Chief executive António Simões said:

"Over the last five months we have rigorously reviewed our business, listening to investors, customers, partners and employees. This work has deepened my belief in our strong foundations and excellent potential.

“L&G is in prime position to respond to and benefit from major structural and societal changes. Changing demographics, climate transition, economic uncertainty and technology are driving demand for trusted, experienced investors that can manage risk through the cycle, originate productive assets, and deliver returns for savers.”

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ii round-up:

Financial services giant Legal & General Group (LSE:LGEN) today outlined a refreshed strategy under its relatively new CEO including plans for a £200 million share buyback this financial year.

A planned 5% increase in the total 2024 dividend payment is being retained followed by 2% annual increases and similar share buybacks in 2025, 2026 and 2027, subject to market conditions. The existing four divisions will reduce to three, with its L&G Capital (LGC) operation, which invests in areas such as specialist commercial real estate and clean energy, being merged into the L&G Investment Management (LGIM) business.

Shares in the FTSE 100 company fell 5% in UK trading having come into this latest news down around 3% year-to-date. That’s better than a 20% fall for Asia-focused Prudential (LSE:PRU) but worse than an 8% gain for rival Aviva (LSE:AV.). The FTSE 100 index is up 6% in 2024. 

L&G’s Cala housebuilding business, currently held in the LGC division, will be moved to a new Corporate Investments Unit with the goal of maximising shareholder value ahead of a potential sale. City analysts had been hoping for news on a disposal strategy coming into this update. 

New head António Simões also detailed plans for a new target of 6-9% compound annual growth in overall group core operating earnings per share between 2024 and 2027.

Its biggest division, L&G Retirement Institutional (LGRI), accounting for 43% of 2023 sales, will now be called Institutional Retirement. It will target annual growth in bulk annuities or Pension Risk Transfers (PRT) over the next five years of between £10 billion and £13 billion, up from a previous £8-10 billion.

The Retail division, generating 26% of 2023 sales and offering a wide range of products to individual consumers, will use AI to improve efficiency. It will now target 6-8% annual earnings growth to 2028, above City hopes of around 5%. 

L&G's first-half results are scheduled for 7 August. 

ii view:

Legal & General sells life insurance, pensions, annuities, general insurance, and other investments to around 13 million retail policyholders and workplace members. Its newly named Institutional Retirement division helps companies outsource the responsibility of making regular pension payments to former staff. The group’s own investment manager oversees assets in the region of £1.2 trillion. Its broad strategic pushes now focus on sustainable growth, a more focused business and enhancing shareholder returns. Geographically, the UK generates the bulk of sales at around 82%, with the USA most of the balance. 

For investors, stated targets are dependent on market conditions and the broader economy, and are therefore not guaranteed. Changes in life expectancy assumptions and accounting rules can impact profit performance. Competition for its investment management business remains highly intense, costs for businesses generally remain elevated, while the sale of insurance products brings exposure to unpredictable events such as the weather and even pandemics in the case of life assurance.   

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On the upside, the new chief executive is looking to reinvigorate the company’s strategy and shareholder returns are being enhanced. Exposure to ageing demographics and pension provision remain core, while group financial strength, or a Solvency II ratio of 224% at its last full year results, remains highly robust. 

In all, and despite ongoing risks, a focus on shareholder returns, including a forecast dividend yield of more than 8%, is likely to be enough to keep income investors happy.

Positives: 

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

Negatives:

• Direct investments such as property take time to sell
• Subject to changes in insurance regulation

The average rating of stock market analysts:

Strong hold