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Legal & General's (LSE:LGEN) a FTSE 100 a stalwart that offers a strong dividend yield. Known for its stability and consistent returns, it is a favorite among income-oriented investors.
In fact, as the share price has retreated over the past few months, the dividend yield has risen again. That's because yields rise as prices fall, and the opposite is true.
So if I were to buy the stock today, I could lock in an 8.8% dividend yield. This is another very attractive reason to buy the stock.
However, we need to look at the full picture.
Are supportive trends fading?
RBC Capital Markets recently highlighted concerns about Legal & General, downgrading it from Outperform to Sector Perform. RBC stated that the pension risk transfer (PRT) market has “it lost some of its luster”, cutting its target price from 295p to 245p.
The bank, which recently took over UK investment manager Brewin Dolphin, said it believes the PRT market holds 50% of its expected revenue until 2028. As such, lower the rate of insurance and wealth manager based on these challenges.
It is true that bulk buy annuities (BPAs) – a type of PRT where a pension plan buys annuities in bulk – has previously been noted as a trend for Legal & General support. And by 2022, Legal & General was the UK's No 1 BPA provider.
This really worries the investors and the re-rating has affected the share price.
However, it is important to note that many analysts remain optimistic about the PRT and BPA market. One forecast I've seen suggests the PRT market could be worth £80bn by 2024, up from £50bn last year.
Furthermore, by the end of 2023, only 15% of UK defined benefit plans have been transferred to insurers.
Analysts are very happy
RBC cut its outlook, essentially holding a neutral view on the company, but consensus is broadly positive.
Currently, there are five Buy ratings on the stock, two Outperform, six Hold ratings, and just one Underperform. The average share price is 263p, which means the stock is currently down 13.9%.
Although this is not much of a discount compared to other stocks in the FTSE 100, incl BT Group again AGLarge-cap stocks don't tend to offer much in the way of share price growth.
And this positive outlook is broadly reinforced by attractive financial metrics. The stock trades at 12.4 times forward earnings, and this is expected to decline to 9.9 times in 2025 and 9.1 times in 2026. That's the best route for a company in what we would generally call a mature industry.
An important point
I have shares of Legal & General in my portfolio on the basis that I will get 9% return in the form of dividends. Of course, these are by no means guaranteed, but I see them as similar to my other bond holdings. I bought it, and will leave it to make modest annual contributions to my portfolio.
Furthermore, while the current share price may be a good entry point, I am concerned that my portfolio is already heavily weighted towards insurers. So I don't intend to buy more anytime soon.
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