There are very few FTSE-listed stocks that offer a better dividend than Legal & General (LSE:LGEN). The insurer currently offers investors a 8.22% dividend yield. However, there’s more to this stock that just dividends.
I’ve bought (more than) 4,273 shares
Buying 4,273 shares in Legal & General would currently cost me £10,000 with the stock trading at £2.34 per share. That’s clearly a lot of money, but I’ve got a lot of conviction in this stock.
In fact, I have a large holding already. I’ve previously bought more than 4,273 shares in the insurer, but not all at once.
Instead, I’ve been using pound-cost-averaging. That means buying smaller stakes at regular intervals in an effort to reduce the impact of market volatility.
And I’m still adding to my position when entry points emerge. I don’t quite have the capital for another 4,273 right now.
But if I had exactly that amount of shares in Legal & General, I could expect to receive £822 this year. That’s really significant, and would aid my portfolio’s passive income generating capacity.
Dividends
Legal & General doesn’t engage in share buybacks. Instead, all of its value to shareholders is distributed in the form of dividends. So it’s really important that we take a close look at the health of the dividend.
One way of doing that is the dividend coverage ratio. This tells us how well a company’s earnings cover its dividend payments, providing insight into the sustainability of those dividends.
The formula for the dividend coverage ratio is typically earnings per share (EPS) divided by the dividend per share (DPS).
A ratio greater than one indicates a company is earning more than it’s paying out in dividends. And a ratio around two is normally considered healthy.
Legal & General’s dividend coverage ratio in the year to December 2022 was 1.98. So that’s healthy, especially when we consider that insurers typically have strong cash flows which make meeting dividend payments easier.
Tailwinds
Over the past year, the decline in the stock price is partly attributed to interest rates, which have adversely affected the group’s assets under management (AUM).
The total AUM significant decreased, falling by £132bn to £1.158trn in the first half of the year alone.
Additionally, investors withdrew £19.7bn from LGIM’s (Legal & General’s investment arm) UK Defined Benefit Solutions business during the first six months of the year.
In short, the high interest rate/low growth environment hasn’t been positive for Legal & General.
However, overall business performance has remained remarkably strong despite this pressures. In H1, the company reported an operating profit of £941m, in line with its five-year objectives.
Moreover, L&G’s Solvency II coverage ratio increased from 212% to 230% and the board says it’s on target to generate £8bn-£9bn in capital by 2024.
There’s also bulk purchase annuity (BPA) to consider. This involves the transfer of a defined benefit pension scheme’s obligations to an insurance company.
BPA have become increasingly popular, especially as pension scheme sponsors seek to de-risk their liabilities.
However, only 15% of the UK’s defined benefit programmes have been transferred to insurance providers. And guess who is the leading BPA provider? Yes, Legal & General.
The post I’d buy 4,273 shares of this FTSE 100 stalwart for £822 in passive income appeared first on The Motley Fool UK.
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James Fox has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
