Legal & General (LSE: LGEN) shares have been more resilient than some in the financial sector. But we’re still looking at a 9% fall over the past 12 months. And there’s been pretty much no overall movement over five years.
I think insurance stocks can provide top returns, and can often generate oodles of cash. But rewards can be volatile, so I’d rate it for long-term investors only. With that in mind, there are three reasons I’d rate the shares a buy right now.
Dividends
Year-to-year earnings have been erratic. But that’s just the way things work in the life assurance and financial services business. And Legal & General has maintained an attractive dividend, thanks in part to healthy cover by earnings.
Earnings dipped in 2020, but the 6.6% dividend was still covered 1.3 times. I think that’s fine in a down year. And by 2021, an earnings recovery meant 1.9 times cover.
For 2022, analysts expect a dividend yield of 7.4%, rising to 8% for 2023. This year’s should be covered 1.8 times by forecast earnings.
In November, the company confirmed it expects “to deliver resilient FY22 operating profit growth in line with the 8% delivered in H1 and FY22 capital generation of £1.8bn.” The dividend looks safe to me.
Valuation
Legal & General’s valuation in price-to-earnings (P/E) terms has been consistently low for years. The ratio was only about 8.7 at the end of 2021. And forecasts suggest 7.5 this year.
That’s close to just half the long-term FTSE 100 average. But there are reasons to be cautious. One is that, due to the often cyclical nature of the business, the market tends to rate insurance firms on a lower multiple than average.
But I reckon just about all financial stocks look undervalued thanks to the banking crisis, Brexit, Covid, recession… it’s been a string of disasters. It might take some time for an upwards revaluation, but I stress again that I’m only thinking about long-term investors here.
Pessimism
The seemingly low valuation mostly comes, I think, from a pessimistic economic outlook. And the world seems to be lurching from one crisis to another. The UK narrowly avoided recession in 2022, but it seems pretty certain for 2023.
Top investor Sir John Templeton famously suggested that “the time of maximum pessimism is the best time to buy“, He was a contrarian investor, and made plenty of money from it.
I don’t want to buy shares when the market is bullish and pushing a sector to high valuations. I prefer to buy when nobody else wants them, and I can pick up the shares heap.
Risk
Of course, nothing is without risk. And I’ve touched on some of it already. Global economics in 2023 and beyond could well extend the long bearish trend that’s been holding financial shares back. And that pessimism, well, it’s gone on for about 15 years now.
So long term really has to mean long term. But with such a horizon, I think Legal & General shares could be the best buy in the sector.
The post 3 reasons to buy Legal & General shares today appeared first on The Motley Fool UK.
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Alan Oscroft 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.
