Can Legal & General boost shares by bucking dividend trend?

Legal & General has resisted calls from the Bank of England (BoE) to make concessions during the challenging conditions created by the coronavirus pandemic.

Executives are sufficiently optimistic about the insurer's robust financial health that Legal & General will pay its final dividend for the year, distributing £753 million to its shareholders.

This takes dividend payouts for the financial year over the £1 billion mark, with this policy very much at odds with the strategies initiated by other leading insurers.

Financial institutions have been asked to strip back dividends and bonuses amid fears that the pandemic will create a severe and sustained economic downturn.

Legal & General resist advice given by Bank of England

The UK's leading banks suspended around £8 billion of dividend payments following explicit guidance from the BoE. Insurers were advised to take similar steps in a 31 March letter from Sam Woods, the chief executive officer (CEO) of the BoE's Prudential Regulation Authority.

Woods implored insurers to 'manage their financial resources prudently' in response to the economic risk posed by the pandemic. Legal & General interpreted this broad advice as scope to honour dividends and executives bonuses if the company's overall financial health would not be compromised.

RSA and Direct Line were among those who scrapped shareholder payouts for 2020, a £1.3 billion dividend cancellation undertaken by UK insurers. When that news broke on 8 April, it was widely expected that Legal & General would fall in line sooner rather than later.

Opening trading on 20 April with a share price of 205.6p will give Legal & General executives a sense of vindication for bucking the trend.

There have been rumours of acquiescence on the subject of executive pay, with cuts to bonuses and the deferral of share options mooted as options to manage liquidity during the pandemic and, perhaps equally significantly, shape public opinion towards the brand.

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Executives remain confident in the company's solvency

While dividends and bonuses may not generate goodwill among the general public at a time when the population is placed under enormous economic strain, this strategy has injected momentum into the Legal & General share price.

Legal & General shares finished trading on Friday 3 April at 159.7p, with expectations of a dividend cancellation driving prices down.

That evening, Legal & General announced their intention to keep dividends in place. The benefit of this was evident when trading resumed on Monday 6 April, with the Legal & General share price soaring by 17%.

Further gains followed, with a close at 205.4p on Friday 17 April concluding a three week period where the Legal & General share price posted a rise of around 7%.

In that same period, RSA shares shed 14% of their value and the Direct Line share price weakened by 3%.

The FTSE 100 swelled by 3% in the three weeks of trading between 30 March and 17 April. With that 7% increase, the Legal & General share price has displayed an ability to outperform the FTSE 100 and to move on a completely different trajectory to fellow insurers.

A statement made to investors on 3 April stated that the Legal & General Group's solvency position remained robust enough to follow through on a dividend recommendation of 12.64p - a 7% increase on the previous fiscal year.

That statement confirmed Legal & General's motives, that the company 'recognises the importance of dividend income to many institutional and retail shareholders, particularly in the current environment'.

Only time will tell if the optimism in the insurer's ability to operate normally has been misplaced. For now, bucking the dividend trend has given the Legal & General share price a significant advantage over other UK insurers.

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