Legal & General shares: still a top FTSE 100 dividend stock post-results?

Legal & General (LON: LGEN) shares dipped by 2.7% to 227p yesterday after reporting a mixed set of H1 earnings. The FTSE 100 company saw operating profit dip to £941 million, £17 million less than in the same half of last year. However, this was significantly above the £834 million indicated by a company-compiled consensus poll.

Further, the crucial Solvency II coverage ratio, which stands as the barometer of financial resilience for insurance companies, now stands at an impressive 230% — up from 212% in H1 2022 and demonstrating a £9.2 billion surplus.

Legal & General dividend

The FSTE 100 company is most closely followed for its dividend, which currently stands at circa 8.5%. The long-term strategy is to maintain annual 5% growth in the dividend until fiscal year 2024 —and declaring a 5.71p distribution for the period, this did indeed represent a 5% increase compared to a year ago.

Further, this policy appears relatively well funded, with the company recording £947 million in capital generation. It has achieved £5.9 billion of capital generation midway through its five-year strategy and aims to reach between £8 billion and £9 billion by 2024.

For context, dividend distribution to date now stands at £3.6 billion, and the other side of LGEN’s plans is for this figure to reach between £5.6 billion and £5.9 billion by 2024 — and this leaves £600 million in net surplus generation.

Outgoing CEO Nigel Wilson noted that the company remains ‘on track to achieve our five-year ambitions and deliver attractive returns for our shareholders... we delivered £0.95 billion of both IFRS operating profit and capital generation, together with a Solvency II ratio of 230% and a surplus of £9.2 billion.’

FTSE 100: LGEN caveats

While the insurer delivered on its dividend policy, LGEN is not immune to the wider financial environment, even given the generally defensive nature of insurance. Assets under management fell by 10% over the year to the end of June, with £1.2 trillion of AUM down by £12.3 billion — partially driven by historically high inflation and comparatively higher interest rates.

Worse still, higher-than-expected wage growth this week could make more deeply ingrained inflation more likely, and consequently, further base rate rises. This matters because higher rates means that defined benefit pension scheme operators can offload pension risk to insurers like LGEN more cheaply than in the past, through bulk annuities.

With assets under management falling, LGEN’s asset management division LGIM saw operating profits drop by 29% to £142 million. However, this is becoming a more common story for insurers across the country, and could to some extent be attributed to a structural problem associated with tighter monetary policy.

However, Wilson did note in an analyst call that the company is experiencing ‘slightly more tailwinds than headwinds.’ The retiring CEO is being formally replaced with António Simões from 1 January 2024.

Analyst commentary

KBW analysts picked up on the AUM outflows, but reiterated their ‘market perform’ rating. Meanwhile, Jefferies continues to consider LGEN a ‘buy,’ with a 335p price target, on the premise that ‘whilst it is not in our base case, the probability of a buyback being announced at the FY23 results is higher than ever.’

Speculation of a share buyback announcement had perhaps spurred the stock higher prior to the results being delivered.

Panmure Gordon highlighted the prospective dividend yield of 8.7%, which is now inflation-beating, and now also rates LGEN as a ‘buy.’ On the other hand, UBS has a neutral target with a 235p target, given the lack of an immediate share buyback announcement. The bank noted that the profit beat was likely ‘driven by higher investment return and back book asset optimisation action in LGRI and Retail.’

But overall, with LGEN shares down by 10% year-to-date despite an on-track dividend policy, it could remain a favoured FTSE 100 dividend stock for passive investors.