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Legal & General (LSE: LGEN) shares have had a good run recently. Over the last three months, they’ve climbed from 245p to 300p – a gain of around 22%.
What’s interesting is that after this share price rise, three brokerage firms have come out with Sell ratings on the insurance stock. So, could it be time to cash in and look at other opportunities in the market?
Multiple Sell ratings
The three firms that have put Sell ratings on the shares are Citigroup, Goldman Sachs, and UBS. All of these firms downgraded the stock to this rating between 10 and 11 August.
Citi’s new price target is 245p, implying a drop of around 18% from current levels. It expects to see lower pension buyout volumes, written at thinner margins.
Goldman’s price target is 257p, implying a drop of around 14%. It expects lower Contractual Service Margin (CSM) release – where unearned future profit on insurance contracts is gradually recognised and ‘released’ into the company’s operating profit – and higher asset management costs to hit profits.
As for UBS, it has a price target of 280p, implying a drop of 7%. It’s worried about earnings in the Institutional Retirement business and the ability of the company to pay its dividend.
What’s the best move now?
If it was just one firm downgrading the stock to Sell, I wouldn’t pay much attention. This happens all the time (and brokers often get it wrong).
But the fact that three brokers have come out and downgraded the stock simultaneously is a bit concerning to me. It suggests they all see risks that most retail investors are probably not aware of.
For me, a big risk is the dividend. I’ve said for a while now that it doesn’t really look sustainable.
Over the last decade, the payout has been increased so much that it now represents most of the company’s earnings. So, I think there’s a decent chance of a cut in the medium term (a cut could hurt the share price).
Another issue for me is the complexity of the business. This is not your average insurance company.
Today, Legal & General has its fingers in many pies – it has exposure to the property market, private credit, pension risk transfers, index funds, clean energy projects, and more. So it’s hard to know what the real risk level here is.
Now, obviously the big dividend on offer today is a major attraction. The yield is currently around 7% and that’s hard to ignore.
Another attraction is that like other insurers, the company could potentially get more efficient in the years ahead with AI. In the insurance industry, AI can be used to reduce customer service costs, improve underwriting and pricing models, and enhance fraud detection.
Overall though, I’m not so bullish on the shares today, especially after the three recent Sell calls. In my view, there are better opportunities in the market to consider, whether someone is looking for growth and/or income.
I’m not saying that it’s time to completely offload the shares. But selling a few shares – while the price is high – to take advantage of other opportunities is a move that could be worth thinking about.
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Edward Sheldon does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
