Legal & General (LSE: LGEN) has long been one of the most popular dividend shares among UK investors, and it’s not slowing.
Last week, AJ Bell’s ‘Top Buys’ list revealed that the FTSE 100 insurer made up 15% of all stock purchases. With the shares offering a dividend yield of 7.63%, it’s easy to see why.
After years of slow growth, that income combined with a recovering price is highly appealing. Including dividends, the total return over the past year has been about 33%.
So is this finally the moment to take profits, or could the recovery have further to run?
Why the shares are getting attention
The recent rebound isn’t based purely on market hype. L&G’s latest results showed tangible progress:
- First-half core operating profit increased 7% to £918m.
- Asset-management operating profit rose 10% to £222m from £202m.
- Core operating earnings per share increased 11% to 12.15p.
- A £1.2bn share buyback, with about £450m completed by the end of July.
The group also benefits from structural demand in the pension-risk-transfer market, as employers continue looking for ways to remove pension liabilities from their balance sheets. Its retail and asset-management operations add further sources of earnings.
For income investors, the numbers are easy to understand. A £10,000 investment yielding 7.63% would theoretically generate £763 a year before tax, assuming the payout’s maintained.
But the yield would fall if the share price continued rising, and a higher price could reduce the attraction for new buyers. So it’s not an obvious Buy just yet.
The case for caution
A large yield doesn’t always mean good value. It can also signal that investors are worried about future growth, dividend cover or the company’s ability to generate cash consistently.
L&G remains sensitive to interest rates, regulation, market movements and capital requirements. The average analyst price target is only about 274p – somewhat below the current price of around 287p.
Citi recently retained its Sell rating despite raising its target price from 245p to 248p. It highlighted falling new-business margins and lower pension buyout volumes in the first half.
Those concerns don’t invalidate the income case, but they explain why the market hasn’t given L&G a much higher valuation.
I’m on the fence
To me, this recovery isn’t an obvious profit-taking opportunity, nor an immediate buy signal. L&G’s earnings, capital generation and shareholder returns are moving in the right direction, while its retirement businesses have long-term support.
But that doesn’t guarantee growth. A dividend cut, weaker capital generation or disappointing new business could quickly change the argument. It pays to regularly reassess whether a stock allocation remains in-step with your investment strategy.
Still, while I try not to blindly follow market hype, there’s certainly a strong case here. For long-term income seekers, Legal & General has always been a stock worth considering, in my opinion – and now, more than ever, it’s looking attractive.
The real question is whether the company satisfies this new batch of investors at the next earnings call. If not, the current narrative could change quickly.
For those looking to reduce risk, balancing it with other income stocks can help – and I think I’ve found one…
What income stock do we like better than Legal & General Group Plc right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at an income share we think is worth your time.
Mark Hartley owns shares in Legal & General.
This story originally appeared on Motley Fool
