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The Legal & General (LSE: LGEN) share price has underwhelmed since I added it to my SIPP in 2023. I wasn’t too upset. It’s the most generous dividend stock on the FTSE 100, with a yield of almost 10% when I bought it. That income made up for the lack of growth. Suddenly though, I’m getting both.
Legal & General shares have climbed 24% in the last three months. They’re breathing down the neck of FTSE 100 growth monster Rolls-Royce, up 25% in that time. What’s going on?
I’m being cheeky, cherry-picking my dates like that. Over five years, Legal & General shares have gained just 9.6%. Rolls-Royce has rocketed 1,220%.
Legal & General will never go gangbusters. But it’s building momentum. If this continues, it could become the ultimate UK dividend growth stock, rather like rival Aviva has been lately. Investing tends to move in cycles. Could this be Legal & General’s turn to shine?
Why are investors suddenly buying?
What’s driving the recovery? Management has simplified the business, focused on higher-return operations, generated plenty of cash and shown it’s prepared to hand a lot of that back to shareholders.
The trailing yield is still 7.02%, the highest on the blue-chip index. That means nothing if the dividend isn’t sustainable, but Legal & General has an excellent long-term record.
The board cut payouts during the financial crisis in 2008 and 2009, then froze them during the 2020 pandemic. That aside, shareholders have enjoyed annual increases every year this century. Over the last 15 years, the dividend has grown by an average pace of 10.23% a year.
Sadly, future increases will slow to 2%. But I’d rather take a smaller rise than an unsustainable one.
On Wednesday (5 August), Legal & General reported a 7% increase in first-half core operating profit to £918m. It expects full-year profit growth to exceed the top end of its 6% to 9% target range.
Shareholder payouts look secure, with a healthy 201% Solvency II coverage ratio. The board hiked the interim dividend by 2% and ploughed on with its record £1.2bn share buyback.
Can the recovery continue?
I can see three reasons why Legal & General shares could keep climbing:
- • That high yield should continue attracting income investors.
- • Share buybacks reduce the number of shares in issue and can support earnings per share.
- • When interest rates start falling again, sentiment towards dependable income stocks could improve further as yields on cash and bonds slide.
But I can also see three threats:
- • Dividend growth has slowed sharply.
- • Lower interest rates could reduce its investment returns.
- • After the recent rally, much of the good news may be priced in.
My own shares are up 33% since I bought them. With dividends reinvested, my total return is 67%. And I’ve only received half a dozen so far. I’m hoping this will turn into a brilliant long-term compounder. And on a forward P/E of roughly 11 to 12, the shares don’t look expensive either.
There will almost certainly be bumps along the way, but I still think Legal & General is well worth considering for income-focused investors. With luck, we’ll get some growth too. Just not Rolls-Royce growth.
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Harvey Jones owns shares in Legal & General and Rolls-Royce.
This story originally appeared on Motley Fool
