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A bullish L&G resets dividend

Given the context and management optimism, a ‘pause’ in the annual pay-out is no disaster
A bullish L&G resets dividend
  • Management opts for ‘pause’ in shareholder distributions in 2020
  • Dividends to rise 3 to 6 per cent a year from 2021
  • Broader investment and business outlook remains bullish
IC TIP: Buy at 229p

Legal & General (LGEN) has set out a bullish five-year plan to boost cash, earnings and surplus generation through an ESG-led growth strategy, amid a subtle readjustment in its income-paying credentials.

In a wide-ranging update, the financials services giant mounted a defence of its long-term performance, as well as its record throughout the pandemic. So far in 2020, neither the group’s traded or direct investment portfolios have seen defaults, with 99.5 per cent of scheduled cash flows from the latter accounted for.

The group also reiterated its ongoing forecast for a 20 per cent annual return on equity, despite continued pessimism around insurers’ long-term ability to handle low-to-negative interest rates.

Since June, solvency levels have also risen, while each of the group’s general insurance and pension risk transfer divisions have continued to growth. Despite market volatility in the asset management arm and lower lifetime mortgage and individual annuity volumes, the group expects full-year operating profits to match the £2.3bn recorded in 2019.

Including the current year, L&G said it now intends to generate between £8bn and £9bn in cash and capital in aggregate, until 2024. Chief executive Nigel Wilson said recent developments around a Covid-19 vaccine had “zero” impact on the group’s projections.

However, the group has chosen to ‘pause’ its dividend at 17.57p a share in 2020, before resuming progressive “low to mid-single digit” dividend rises from 2021. In concrete terms, chief financial officer Jeff Davies said this would mean annual increases of between 3 and 6 per cent, below a previous aspiration of 7 per cent.

Shareholders can therefore expect total distributions to hit between £5.6bn and £5.9bn by the end of 2024, suggesting management wants to materially boost both dividend cover and surplus capital.

Despite the confident tone, L&G shares dipped more than 3 per cent as some investors took profits on the shares’ recent rally.

We would not read too much into that, especially with the stock off a quarter this year. Instead, investors should focus on profits that are on course to match the 2019 outturn, the resilience of cash flows from assets, and what management describes as a bounty of opportunities in which to deploy capital or invest.

Regardless, income seekers can still take comfort in a dividend yield of 7.7 per cent, which even after the vaccine news bounce, remains attractive. The latter development undoubtedly improves the perception of risk, as bond yields rise and investors re-appraise the challenges to L&G’s credit portfolio. The evidence to date suggests those risks were possibly overdone to begin with. Buy at 229p.

Last IC View: Buy, 218p, 5 Aug 2020