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Legal & General (LSE: LGEN) shares have taken off over the past week, rising 8.7% without any fresh company news to explain the rally. That’s a rare burst of energy for this dependable dividend payer. One that will have dividend income investors paying attention.
The FTSE 100 insurer and asset manager offers one of the most generous yields in the index with a trailing yield of 8.74%.
Growth expectations for the dividend have been trimmed from 5% to 2% a year, but the yield is still forecast to hit 8.81% this year and 9.01% in 2026.
So is it sustainable? The board reckons so. However, it has trimmed dividend growth expectations from 5% to just 2% a year. That’s disappointing, but understandable.
A FTSE 100 income machine
Legal & General’s 2024 full-year results, released in March, were solid. Core operating profit climbed 6% to £1.62bn, while core earnings per share followed suit.
The board also announced a new £500m share buyback for 2025. That forms part of a plan to return over £5bn to shareholders over three years. That’s around 40% of the group’s market cap.
The group has simplified its structure, offloading its Cala Homes housebuilding arm and US protection business, while strengthening its institutional retirement and asset management divisions. Assets under management remain vast at £1.1trn, although they have no doubt taken a beating during recent uncertainty. The solvency ratio is a robust 232%.
Despite its strengths, it’s rare to see this stock bounce nearly 9% in a single week. Especially without any company or sector news. President Trump relenting slightly on tariffs helped. That’s not to be relied upon though.
It may also be down to traders looking ahead to falling interest rates. That would make high-yield stocks like this one far more attractive than bonds or cash, albeit with capital risk.
A growth stock in disguise?
Legal & General isn’t traditionally seen as a growth story but it’s building new lines of revenue. It wrote £10.7bn in global pension risk transfer deals last year, including record levels in the US and Canada, and is pivoting its asset management arm toward higher-margin products. An investment in US real estate specialist Taurus and a new partnership with Japanese insurer Meiji Yasuda also open up fresh opportunities.
Nothing moves in a straight line. Bumpy earnings in recent years have pushed the valuation to a bloated-looking 85 times earnings. That would normally send me running. But with the yield so high that lofty valuation feels more like an anomaly than a dealbreaker.
Long-term value through income
Forecasts are always slippery, especially during times of geopolitical tension. The 15 analysts tracking the stock have set a median one-year price target of 267.5p. If correct, that’s modest growth of around 8% from today’s of 248.8p,
Forecasts are never to be relied on, and especially today. But this confirms my view that any share price growth will be modest. Dividends remain the real story here.
Legal & General is not a stock to chase for short-term thrills, even if we got one last week. But for long-term investors aiming to build a high and hopefully rising income stream, I think it’s well worth considering. It won’t be red hot for long, but with luck should remain a slow burner for years.
