Legal & General increases profit and pays bumper dividend

Always a generous dividend payer, the FTSE 100 insurance giant has increased the payout again as profits grow. Our head of markets runs through the interim results and also latest developments moving global share prices.

Markets remained flat in the US, with investors unable to break away from the current impasse between economic strength and high inflation.

The latest inflation reading tomorrow is expected to confirm that further Federal Reserve tightening will be on the cards, with the majority expecting a further hike of 0.75% in September and a possibly terminal rate of 3.65% by March, compared to the current 2.5%.

• Discover more: Buy international shares | Interactive investor Offers | Most-traded US stocks

Amid fears of the world’s largest economy nearing recession, however, the latest blow-out non-farm payroll number from last week has, at least for the moment, put such fears to bed. The labour market is apparently signalling that the economy remains generally robust, meaning in turn that it is strong enough to withstand further rate rises without tipping into recession.

In the meantime, the major indices have recently recouped some of 2022’s losses, although still standing in negative territory in the year to date. The Dow Jones is down by 10%, the S&P500 by 13% and the Nasdaq by 19%.

Asian markets were generally positive including China, which saw modest gains, despite the recent escalation of tensions following the visit of Nancy Pelosi to Taiwan, and the ongoing outbreaks of Covid-10 capping any immediate economic recovery.

The generally lethargic seasonal mood fed through to the FTSE100 in early exchanges, with the index largely flat but remaining ahead by 1.3% in the year to date.

Legal & General delivers 

Legal & General Group (LSE:LGEN) posted an increase of 8% in half-year operating profits, comfortably beating expectations, while growing cash and capital generation by 22% and 14% respectively. 

The group has the ability to generate assets through its bulk annuity, or Pension Risk Transfer (PRT) division, to then be managed by other parts of the business. New business premiums for the PRT unit grew by £4.4 billion in the period from a previous £3.1 billion, while the contribution from international clients continued to lessen the reliance on purely UK profits. In the Investment Management business, where international assets account for 36% of the total being managed, there were net inflows of £65.6 billion.

In addition, the Capital unit provides exposure to alternative assets such as commercial real estate and housing, which serve to underpin the annuity business.

• 12 stock ideas for brave bargain hunters

The measure of capital strength for the company, the Solvency II Coverage Ratio, increased to 212% from 182% and enabled a further increase to the dividend, leaving the shares on a projected yield of 6.9%. The level of this yield has not only compensated for any share price weakness in terms of total return, but is also adequately covered, leaving future payments secure barring any exceptional factors.

While companies such as L&G benefit from a rising interest rate environment, they are also prone to outflows or underperformance given market volatility, and this has been an overhang over the last year, where the shares have fallen by 2% as compared to a gain of 5% for the wider FTSE100.

Over the last three months, the shares have bounced by 13% given the interest rate backdrop. With its undoubted capital strength and the virtuous circle which its four operating units create, all in growing markets, the market consensus of the shares as a 'buy' remains firmly intact.