5 reasons why Legal & General shares are too cheap


Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on

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I’m really surprised that Legal & General Group (LSE: LGEN) shares are trading at such low prices this summer. My wife and I have owned this stock for over a year, but the share price is down over this period.

For the record, we bought L&G stock for our family portfolio in July 2022, paying an all-in price of almost 247p a share.

As I write, this FTSE 100 stock trades at 230.1p, valuing the life insurer and asset manager at nearly £13.8bn. This means that we are sitting on a paper loss of around 6.7% on our holding. Meh.

At their 52-week high, Legal & General shares peaked at around 288p last August. However, a liquidity/solvency crisis among mid-sized US banks in March sent financial stocks crashing worldwide.

Here’s how the L&G share price has performed over seven periods:

One day -1.2%
Five days +1.0%
One month +1.6%
Year to date -7.7%
Six months -9.7%
One year -18.1%
Five years -9.4%

Though the shares are down almost a tenth over six months and more than 18% in 12 months, I’m surprised they have lost value over five years. However, these returns exclude cash dividends, which are very generous at L&G.

I see L&G stock as too cheap

If we didn’t already own Legal & General shares, I would be eager to buy them today. Here are five reasons why:

1. Financial strength

Legal & General’s solvency ratio — one key measure of an insurer’s financial stability — has risen strongly since the Covid-19 crisis.

At the end of last year, L&G had a solid solvency coverage ratio of 236%. This left it holding £9.9bn of surplus capital at end-2022. Over time, I’d expect some of this extra capital to be returned to shareholders via dividends and share buybacks.

2. Earnings growth

Apart from a brief hit during coronavirus-stricken 2020, Legal & General has increased its earnings per share (EPS) every year since 2011. In 2011, EPS hit 12.42p, while last year, it reached a record 38.33p. That’s a fantastic record of earnings growth that I hope to see continue in the years ahead.

3. Delicious dividends

We bought L&G stock primarily for its ability to produce extra passive income for our portfolio in future. In 2011, dividends per share totalled 6.4p. Last year, this figure was 19.37p — and I expect this payout to keep rising.

4. Low rating

At their current price, L&G shares trade on a lowly multiple of 6.3 times earnings, producing a solid earnings yield of 15.8%. This covers the current dividend yield of 8.4% a year almost 1.9 times, which is a comfortable margin of safety.

5. H1 results on 15 August

L&G releases results for the first half of 2023 on Tuesday, 15 August. If these figures are as good as I hope, then this might act as a new catalyst to drive the shares upwards again.

Of course, I could be wrong, because if financial markets plunge again (as they did in 2022), L&G’s earnings could take a knock. Even so, I regard this stock as a Footsie champion for the long run!



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