Legal & General yields 8.9% — but how secure is the dividend?

Among FTSE 100 firms, Legal & General (LSE: LGEN) offers the highest dividend yield. At 8.9%, it is well over triple the index’s average.

But markets have not reacted well to the financial service’s full-year results published today (11 March), with the share price being marked down sharply.

A lower share price has helped to push up the yield – and Legal & General also delivered as expected when it came to raising the annual dividend yet again.

So, what’s going on?

After all, a high yield can be a red flag when it comes to dividend sustainability – and a share price fall of 17% in five years against 53% growth in the FTSE 100 during the same period also suggests that many investors are shunning the stock.

First, the good news about the dividend

The increase in the full-year dividend per share was 2%. That is exactly in line with what shareholders were expecting under the company’s dividend policy.

That policy foresaw cutting annual dividend per share growth from its previous 5% to 2% from last year, but spending more than before on buying back shares.

Buybacks are seen as a way of returning capital to shareholders, as they reduce the number of shares in circulation by giving money to existing shareholders who sell their shares to the company. That can also boost earnings per share.

Personally as an investor I generally prefer dividends to share buybacks. But they do at least indicate that a company has cash to spare. This week, Legal & General is starting the largest buyback in its history, of up to £1.2bn.

Taken together with the dividend increase, that means the firm plans to return £2.4bn to shareholders in the coming year. That is equivalent to around 17% of its current market capitalisation – a considerable amount.

Could the well run drier?

So, why do investors seem unimpressed?

That planned share buyback partly reflects the cash proceeds from the sale of a large US business. Money received from asset sales are a one-off, unlike cash earned from ongoing business. So that big chunk of money is exceptional, while the sale of the business could lead to lower revenues and profits.

There are other risks too. Choppy financial markets could lead to policyholders pulling out more money than they put in, hurting earnings. That could be bad news for funding the dividend. It is no coincidence that the last time Legal & General cut its dividend was during the 2008 financial crisis.

Still, while the company’s earnings are not as strong as they were a few years back, last year did show improvement. Core operating profit grew 6% year on year, while the post-tax profit attributable to equity holders more than tripled.

Legal & General has a proven business, a powerful and long-established brand, clear strategic focus, and large customer base.

If it keeps doing well, I think the dividend ought to be sustainable. Given the income prospects, I see it as a share for investors to consider.

The post Legal & General yields 8.9% — but how secure is the dividend? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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