Are Legal & General shares oversold?

Shares in Legal & General have struggled since January, losing 21% of their value and hitting year lows. The insurer’s share price has been hit by stock market volatility from the Russian/Ukraine conflict. With full-year results due out on Wednesday, what should investors expect?

The financial services provider has a pension annuities business and an investment management division, as well as providing insurance services. It is the UK’s biggest investment manager for corporate pension schemes, a market leader in pension risk transfer and a major global investor, with £1.3 trillion in global assets under management.

Solid interim results from L&G

At the half-year results in August, trading at Legal & General was said to be exceeding pre Covid-19 levels. Operating profit rose 14% to £1.1bn from £946m, with double-digit growth or higher seen in LG Capital, LG Insurance and LG Retail Retirement. Return on equity also improved to 22% from 6.3% in the same period in 2020. The Solvency II coverage ratio - a key measure of an insurer’s financial stability, which must stay above 100% – rose to 183% from 173%.

"Thanks to the hard work and dedication of my colleagues across Legal & General, we have delivered a strong set of financial results, with EPS up 21% since H1 2019,” Nigel Wilson, group chief executive, told investors at the time. “And we expect to deliver double-digit growth in operating profit at the full year.

“We are already a leading asset manager and we remain focused on continuing to scale-up our asset origination capabilities, which are a unique and important component of our synergistic business model which has driven our 22% ROE."

Global pension transfer risk new business premiums came in at £3.1bn for the half-year, with £2bn of new business already in place for the second half. Meanwhile, the investment management business saw external net flows of £27.4bn (compared to £6.2bn in 2020), with assets under management up 7% to £1.3trn. Individual annuity premiums also increased by 15%.

Deutsche Bank’s long-term optimism, short-term pessimism

Last week Legal & General issued a statement to reassure investors concerned about exposure to Russian stocks in the light of the Russian invasion of Ukraine. This, it says, is “small; approximately 0.1% of our assets under management” and mostly held through index funds and ETFs. The company says it is “actively working with the major index providers to confirm Russia’s future role in global indices.”

Meanwhile, Oliver Steel, analyst at Deutsche Bank, thinks the long-term trends for Legal & General - such as the aging population - are positive but is concerned about prospects for the shares in the immediate term. He says investors will be looking for more information about the trade-off between increased industry bulk annuity volumes versus increased competition. They will also be considering rising bond yields and corporate bond spreads, plus the health of L&G’s Solvency II ratio.

Steel, who has a 335p price target on the shares, also points to the likelihood of a change in chief executive later this year. “Overall, our view on the shares remains supportive, but our enthusiasm near-term is tempered by the likelihood of continued market volatility and clearer positive catalysts and valuation upside at Aviva (AV),” he said in a note.

Legal & General’s chunky dividend yield

At 243.7p, the shares currently boast a generous dividend yield of 7% and look oversold. Analysts at Barclays Bank recently reiterated their ‘overweight’ rating on the stock, with a price target of 406p. At these levels, the shares are a long-term buy, although - with the likely continued stock market volatility - things could get worse before they get better.

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