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5 reasons why Legal & General shares are too cheap

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

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!

The post 5 reasons why Legal & General shares are too cheap appeared first on The Motley Fool UK.

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Cliff D’Arcy has an economic interest in Legal & General Group shares. 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.