Legal & General struggles to convince

Legal & General is trading well, but investors remain unsure about its long-term potential.

Even though it finds itself in an unloved sector, Legal & General (LSE:LGEN) is clearly a business firing on all cylinders.

The long-term savings market remains one which is ripe for growth as the overall pension landscape continues to evolve. Within this, the resurgence of the annuities market, coupled with the emergence of Pension Risk Transfer, as companies look to mitigate final salary pension schemes, plays into its hands.

In addition, Lifetime Mortgages (equity release) is also an area which is back in vogue, and the company is enjoying the benefits of geographical diversification, with its Asian operation making an increasingly valuable contribution and with the US being a largely untapped, yet significant opportunity.

Within the update, there are any number of positive signs. Assets under management have risen 15%, earnings per share 13%, annuity sales 47% and net profit spiked 13% for the period.

Meanwhile, the capital coverage ratio is very strong, the return on equity stable at around 20% and cash generation has enabled an increase to the dividend, which will add to an already well-covered and attractive yield of 6.7%.

Management comments on the outlook are upbeat, both short and medium-term, as there are additional opportunities washing through a strong pipeline of new business.

Less positively, there are some areas requiring attention although these appear manageable. The cost/income ratio ticked slightly higher in the period, operating profit in the Insurance unit dropped by some 13%, and group debt costs also showed an increase of 11%.

Despite its best efforts and preparation, a negative Brexit outcome would still be a drag on its progress, alongside expectations remaining high for Legal & General’s capital generation. In addition, within a relatively crowded and competitive marketplace, there are seen to be potentially stronger opportunities elsewhere.

The muted reaction to a strong set of numbers is somewhat symptomatic of the difficulty the company has in convincing the market of its longer term potential.

The share price performance has been tepid of late, having dipped 6% over the last year, much in line with the wider FTSE 100 which dropped 7% in the period.

As the company strives to lessen its reliance on its UK market and spread the risk geographically, the market consensus of the shares as a hold, albeit a strong one, is likely to remain in place.