Legal & General, A 7% Dividend Growth Stock that I am Buying

Legal and General is a familiar name for UK dividend investors with many people holding it in their dividend portfolio.

but why is it so popular?

should you have it in your portfolio?

 In today’s post, I will explain why I think  Legal and General should be considered by a dividend investor. I’ll be looking at the company in terms of its dividend yield, dividend history, and dividend safety.

Company Overview

Legal and General is a leading provider of financial services and products in the UK and internationally. The company was founded in 1836 and has a long history of innovation and excellence. Legal and General offers a range of solutions for individuals, businesses, and institutions. These solutions include life insurance, pensions, investments, mortgages, protection, annuities, and general insurance. Legal and General has over 10 million customers and manages over £1.3 trillion of assets.

The company is known for its strong financial stability and its commitment to long-term Investments that support the growth of the global economy. They have a reputation for providing reliable financial products and services.

Legal & Generals most profitable division is the pension risk business. Where they are a leading provider of pension risk transfer solutions for defined benefit pension schemes. The business helps pension trustees and sponsors to secure the benefits of their members and reduce the risks and costs associated with running a pension scheme. They offer a range of solutions, including buy-ins, buy-outs, longevity insurance, reinsurance, and bespoke de-risking strategies. The business has a strong track record of delivering innovative and competitive solutions for its clients, with over £100 billion of pension liabilities transferred since 1986.

One of the main factors that influence the demand for Legal and General pension offerings is the ageing population. According to the Office for National Statistics, the number of people aged 65 and over in the UK is projected to increase by 58% from 12.4 million in 2018 to 19.7 million in 2050. This means that more people will need to save for their retirement, secure their pensions, and manage their wealth as they live longer.

Although the company has a good dividend track record, the question is if its 7% starting yield is safe

Company Dividend

let’s take a look at the fun stuff the dividend information.

At the time of writing Legal & General has an attractive dividend yield of 7.6 percent. Over the past five years, its dividend yield is typically around 6.5 percent. The yield at this level is higher than the industry average which according to the FTSE All-Share Index is 4.2%.

The company also has a great dividend history and has increased its dividends since 2010 with a compound annual growth rate of 9.74% over the past 10 years, The previous five years have seen annual growth of 4.76%.

After a pause in dividend growth in 2020 due to the pandemic, management has given the target of 3 to 6 percent annual growth over the next four years.  This growth is lower as more cash is needed to be reinvested back into the business to accelerate growth and expansion into the US and the European markets while building a presence in Japan and China. 

After 2024 there is no reason why the dividend growth won’t return back to at least 7% annually.

How Safe is their dividend

The company’s dividend policy is to pay out 50% of its net cash generation to shareholders, which means that it only pays dividends from the cash it generates from its operations, not from borrowing or selling assets. This reduces the risk of dividend cuts in case of financial difficulties. The company also has a strong balance sheet, with a solvency ratio of 236%, which means that it has enough capital to withstand severe shocks.

Legal & General’s main sources of income are its insurance, investment management, and retirement businesses, which are all relatively resilient to the effects of the Covid-19 pandemic. The company reported £2,931 in operating profit fin 2022 and increased its dividend to 19,37p per share. A 5% increase in 2021.

However, there are some risks that could affect Legal & General’s dividend safety in the future. The company is exposed to fluctuations in interest rates, equity markets and credit spreads, which could affect its profitability and solvency. The company also faces regulatory uncertainty, as the UK government is reviewing the rules for insurance companies after Brexit.

Payout Ratio

Companies with such high yields are often vulnerable to dividend cuts as they cannot afford to maintain the high dividend; I don’t think this is the case for Legal and General, though. Despite profits taking a hit from the pandemic in 2020, the dividend payout ratio was only 65%, meaning it was easily covered.

The payout ratio tells us how much of a company’s profits are paid out in dividends and generally speaking a healthy payout ratio is around 60 to 70 percent.

However, the payout ratio is not the only ratio to inspect in regard to the dividend we also need to look at the cash flow ratio which tells us how much of a company’s cash is paid out in dividends this is important because although dividends reduce profits they are paid out from cash.

Legal & General has a cash payout ratio of just 12 % which means Dividends are more than covered by cash which is a great sign for potential dividend increases going forward

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Conclusion

Management has proven that they are committed to distributing a high dividend with no cuts. This was demonstrated in 2020 when the Bank of England advised financial firms to suspend their dividend payments, which they all complied with except for Legal and General, who went ahead with the £1 billion dividend payment already planned. I also believe the dividend is safe and while the yield is quite high, the company is growing it over time. Full Disclaimer, I am long Legal and General and aim to add more shares to my portfolio over the next couple of weeks

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