Is this 8.5% yielding FTSE 100 stock a passive income star or deadly value trap?

Legal & General Group (LSE: LGEN) is a passive income superstar. The insurer, asset management and pensions specialist boasts the highest trailing yield on the entire FTSE 100, at just over 8.5%. That would double an investor’s money in nine years, even if there was no share price growth on top. But there’s a catch. There hasn’t been much share price growth lately. Should investors be worried?

The Legal & General share price hasn’t grown over the last decade, standing roughly where it was in December 2015. Given the income, long-term investors should still be nicely ahead, but it’s hardly ideal.

High dividend, low growth

For those who bought a year ago, Legal & General shares have done reasonably well, rising just over 12%. Throw in the trailing yield, and the total return is just over 20%. Not bad.

Until I compare it to FTSE 100 rival Aviva, that is, whose shares are up a thumping 33% in the last year, and 100% over five.

I’m hoping this is a promising precedent. The Aviva share price also idled for years, until CEO Amanda Blanc shook the business back to life. Company performance does tend to go in cycles. Maybe Legal & General could be next to enjoy a sudden upswing. I hope so, because I chose it over Aviva, and I feel that it owes me.

Legal & General should do well as an ageing population battles to build wealth for lengthy retirements, although there’s also a challenge here, because as the cost-of-living crisis drags on, many will struggle to tuck enough money away.

The board says it’s on course to deliver full-year 2025 core operating earnings per share (EPS) growth at the higher end of its 6% to 9% target range, boosted by its fast-growing company pension risk transfer business. Management also sees strong growth opportunities in personal annuities, equity release lifetime mortgages and protection. Its asset management arm is gunning along too.

Earnings growth required

I’m glad to see that because as my table shows, revenues have been bouncing around all over the place lately, with pre-profits falling sharply, while EPS growth plunged in four of the last five years.

That’s lifted the price-to-earnings (P/E) ratio to more to 86. I’d never normally go anywhere near such a pricey stock, it’s way above the FTSE 100 average of 17. However, the shares trade on a much more modest forward P/E of 14, so I’ll give them the benefit of the doubt.

While the wait to see if the shares take off, investors get a blockbuster income. The dividend per share is only forecast to grow by 2% a year but that still lifts the forward 2025 year to 8.72% then 8.89% for 2026. Over the next three years, the board plans to return a total of £5bn through dividends and share buybacks. 

I wouldn’t call Legal & General a value trap, but the board does need to generate more growth. I still think it’s worth considering for passive income seekers though. That yield looks sustainable and is hard to resist.