Legal & General strengthens through regulatory change

Tip Updates 

Legal & General strengthens through regulatory change

BUY

Tip Update: Buy at 269.8p

Tip style
INCOME
Risk rating
MEDIUM
Timescale
MEDIUM TERM
Our previous tip
We said BUY at 262p on 19 Nov 2015
Tip performance to date
+3%

Continued demand for 'de-risking' products among corporate pension schemes has vindicated Legal & General’s (LGEN) decision to focus on the bulk annuity market. UK bulk annuity sales during the first-half of 2017 were up £0.9bn to £1.5bn, while its retirement business also completed an £800m longevity insurance transaction.

Individual annuity sales, more than double the previous year at £345m, are also flourishing on the back of demographic and regulatory trends. With mortality rates for its annuity book well in excess of expectations, management saw fit to release £126m from its reserves. This helped bump-up retirement operating profits by more than a third £566m.

The asset management arm benefited from the popularity of liability-driven and multi-asset investment strategies among defined benefit pension schemes. External net inflows were £20.4bn, up from £9.4bn in 2016. This helped drive a 15 per cent increase in management fee revenue. The direct investment business also continued to grow its portfolio, investing a further £200m in UK housing, infrastructure and SME (small and medium-sized enterprise) finance. Infrastructure investments performed particularly well, gaining 44 per cent in value. However, the general insurance business was a weak spot; an increase in non-weather related claims dampened operating profits, which halved to £15m.

Analysts at Shore Capital expect adjusted EPS of 23.9p for the December year-end, up from 21p in 2016.

LEGAL & GENERAL (LGEN)  
ORD PRICE:269.8pMARKET VALUE:£16.1bn
TOUCH:269.8-270.1p12-MONTH HIGH:280pLOW: 204p
DIVIDEND YIELD:5.4%PE RATIO:10
NET ASSET VALUE: 121pSOLVENCY II RATIO:186%
Half-year to 30 JunGross premiums (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20165.490.9811.34
20173.721.3115.94.3
% change-32+34+41+8
Ex-div:17 Aug   
Payment:21 Sep   

IC View

The shares are up marginally on our buy tip (262p, 19 Nov 2015) and trade at 11 times forward earnings. With a generous yield and the core business growing solidly, we still see value.

Last IC view: Buy, 250.1p, 10 Mar 2017

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