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I Legal & General (LSE:LGEN) share price has fallen by almost 20% over the past five years. But it's worth noting that the dividend means investors who bought the stock in 2019 are still going up.
With a dividend yield of 9.3%, the stock looks like an amazing income opportunity. But analysts don't think it will be around for long.
Analyst's price target
As I write this, Legal & General shares are trading at £2.20. But the analyst price estimate is £2.61 and the maximum expectation is £3.35 – a clear 51% above the current level.
Even the small ones are below the current share price by 4.75%. So it seems clear that analysts are optimistic about the company.
On its own, that's not enough to make me want to buy the stock. But it gives me a reason to take a closer look and see if there's anything here that interests me. As I see it, there may be several important challenges ahead for the business. The big question is whether these are already reflected in the current share price.
Risks and rewards
Legal & General business involves assuming potential future liabilities in exchange for large payments. So the question is not whether there are risks, but how well they are managed.
The UK's market leading pension risk transfer company. In other words, businesses pay the company upfront to cover the future obligations of their pension plans. This has been the source of much of Legal & General's growth over the past few years. And there would be more opportunities in the US, where the company has an established presence.
Those are reasons to be optimistic about the stock – and the dividend. But there are also two major issues that I think investors should consider before thinking about buying the stock.
Challenges
There's a reason billionaire investor Warren Buffett is conservative Berkshire Hathaway except for this type of business. Figuring out what premium to charge involves trying to predict the long way into the future.
Unlike car insurance – where policies usually last for a year – there is plenty of time for things to go wrong with an annuity. And it can lead to huge losses if they do.
To overcome this, the likes of Legal & General must try and make enough money from the premiums they receive. And that brings me to the second issue – this is getting complicated.
A fall in interest rates means that bond yields fall. And I expect this to continue next year, presenting a challenge to insurers who want to invest their premiums at decent rates.
Is this a buying opportunity?
There is a positive side to rising interest rates – the value of bonds held by Legal & General should increase. And analysts clearly believe that markets are overestimating future challenges.
They may be right, but I don't think this is obvious. Even for passive investors, I think there are better opportunities to consider elsewhere.
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