One of the attractions of investing in insurance shares is that they often have attractive dividend yields. Admiral, for example, offers 5.9% and rival Legal & General (LSE: LGEN) yields 7.1%. But the recent dividend cancellation by Direct Line is a reminder that yields calculated based on past payouts do not necessarily help investors know what to expect in future. So, what about the Legal & General dividend forecast?
Dividend strategy
Legal & General is fairly unusual in that it sets out its plans for dividends years in advance, at least at a high level.
In 2020 it set out a five-year plan. Part of that was growing the dividend at low-to-mid single digits in percentage terms from 2021 onwards. So far it has delivered on this: 2021 saw a 5% year-on-year increase in the total dividend, while last year the interim dividend was also raised 5%.
In the absence of unexpectedly weak business performance, I expect this pattern of dividend increases to continue. In November the company told the market it expected to deliver full-year operating profit growth and capital generation in line with its guidance. That suggests the final dividend will be raised in line with the strategy. If business performance this year and next year remains robust, I expect further annual dividend increases of a similar size.
Possible risks
However, any Legal & General dividend forecast is just that: a forecast.
If the business unexpectedly sees profits or capital generation weaken, the dividend is always at risk. That is what happened in 2008, when the payout was cut during the financial crisis.
The current market is a tough one for insurers, as Direct Line’s shock dividend cancellation shows. As recently as November, Direct Line had affirmed its “outlook for dividend capacity”. It pinned the cancellation just two months later on events such as harsh winter weather. Insurers had already been battling with claim inflation before the cold snap and that remains a risk to profits.
There is a risk that such challenging conditions could hurt Legal & General’s profitability too. But I am optimistic on that score. A very cold winter ought to be part of the bread and butter scenario planning for any general insurer. For Direct Line to axe its dividend because of such an event simply makes me think it has suffered from weak management.
I see no reason to think Legal & General will have the same problems that have affected Direct Line, despite operating in overlapping markets.
I’d buy for income
If I had spare money to invest and income was my key priority, the Legal & General dividend forecast would grab my attention. I think this well-run FTSE 100 company has a strong brand and an attractive dividend. So I think it could be a great income pick for my portfolio. I would be happy to buy the shares.
The appeal for me here really would be about income.
Over the long term, the firm’s share price performance has been disappointing. The shares have lost 11% in the past year and are 5% lower than five years ago. So although I would be happy to buy Legal & General for its income potential, if my objective was share price growth I would invest my money elsewhere.
The post Does the Legal & General dividend forecast make it a great buy for income? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.