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What is the highest-yielding share in the FTSE 100? Legal & General (LSE: LGEN), offering 7.1%. What has Legal & General announced today (5 August)? That it will grow its dividend yet again.
I say ‘yet again’ because the financial services company has been doing that for the past few years.
In fact, since the aftermath the 2008 financial crisis led it to slash the dividend, there has only been one year in which the firm did not grow its payout per share.
The latest increase is a modest 2% growth in the interim dividend, in line with the company’s stated policy.
As a long-term investor, though, I am looking further to the future. Could the Legal & General dividend keep growing, pushing up the prospective yield for investors who buy at the current share price?
I see ongoing growth potential
I think the answer is yes, it could.
On that basis – and given the very juicy existing yield – I see this as a share for income investors to consider.
The business benefits from a well-defined commercial model targetting a market that has resilient long-term demand. Its strong brand, large customer base, and deep financial markets expertise have long helped it generate cash and continue to do so.
In the first half, for example, capital generation (reported using what is known as the Solvency II methodology) moved up 3% year on year to £790m. That is not much higher than the dividend growth, but it is higher.
The company emphasised that it sees its capital returns as sustainable. As well as growing the dividend, Legal & General is currently undertaking a £1.2bn share buyback.
By reducing the number of shares in circulation, that could allow it to increase the dividend per share in coming years while actually reducing the cash cost.
That is already happening. The first-half cost of paying dividends to ordinary equity shareholders was £886m, below the £898m cost during the equivalent period last year, despite growth in the dividend per share.
Can the dividend keep getting bigger?
Buying back shares costs money, though. It can also signal that a business does not have better uses for its capital, which may suggest a certain lack of vision in management thinking.
There are risks for Legal & General. The FTSE 100 and FTSE 250 have been riding high lately, but if there is a market downturn then nervous investors could pull more money from funds than they put in, potentially hurting profits.
Set against that risk, though, the recent performance has been solid. Legal & General is a well-run, well-oiled machine with proven cash generation potential.
Its share price performance has been disappointing, with its five year gain of 10% nowhere near matching the wider FTSE 100’s 53% increase during that period. But from an income perspective, I see a lot to like about the share.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
