FTSE 100

Do Legal & General shares offer income investing potential?

Could Legal & General deliver an attractive income return?

Even though the Legal & General (LON: LGEN) share price has risen by around 9% over the past year, it continues to offer one of the highest dividend yields available in the FTSE 100.

Indeed, the diversified financial services business currently has a dividend yield of 6%. This is significantly higher than the FTSE 100 index’s yield of around 3.4%.

Furthermore, the company’s recent financial performance suggests that it is moving in the right direction. Notably, its operating profit increased by 14% in the first half of the financial year. Moreover, it seems to be in a strong position to capitalise on long-term global trends such as environmental change and an ageing population. This could allow it to deliver further profit growth that translates into a rising dividend.

Legal & General’s dividend appears to be relatively well-covered at the present time. In the current year, it is expected to have a payout ratio of approximately 50%. This indicates that its shareholder payouts are relatively affordable.

Meanwhile, the stock trades on a price-earnings ratio of just 8.5. This is among the lowest price-earnings ratios available on the FTSE 100 and is somewhat surprising given the firm’s recent financial performance and long-term prospects.

One potential reason for its low valuation could be investors’ focus on growth opportunities at the present time. Legal & General is not forecast to deliver a material rise in profit over the next 2-3 years. This could mean investors are more upbeat about other FTSE 100 index shares at the present time.

Of course, the company faces a number of risks at the moment. The world economy’s outlook is somewhat precarious, since inflation has soared to levels last seen in 2008 in the UK and in 1982 in the US. This may result in a higher interest rate that dampens the appeal of dividend shares relative to other income-producing assets. A higher interest rate may also hurt economic growth and prompt more challenging operating conditions for many firms.

However, these risks appear to be factored into the Legal & Generals share price. Its low valuation and high yield, that is well covered by profit, indicate that it offers a wide margin of safety. Its strategy to align with long-term global trends may mean dividend growth is relatively strong over the long term.


Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

Join the conversation