Shares in FTSE 100 financial services firm Legal & General (LSE: LGEN) are still lower than they were last March.
The fall resulted from fears of a new financial crisis caused by the failures of Silicon Valley Bank and Credit Suisse.
No new financial crisis happened, but many financial stocks were sold off and have yet to fully recover.
The advent of a genuine financial crisis remains a risk for the shares, of course. Another is that high inflation and interest rates deter new client business.
Nonetheless, I remain very positive about the company for three key reasons.
Business looks set for growth
H1 2023 results showed it is on track to achieve its capital growth target of £8bn-£9bn by the end of 2024. This huge war chest can also provide a platform for major business growth.
The company also remains a market leader in the UK Pension Risk Transfer (PRT) market. This is where a company takes over other firms’ pension scheme commitments and is paid for doing so.
It is in the top 10 in the high-potential US PRT sector too. Only around 9% of this market’s $3trn of defined benefit pension schemes have been transferred so far.
How much value is left in the shares?
Starting with the key price-to-earnings (P/E) ratio measurement, Legal & General currently trades at 7.5.
This is very good value compared to its peer group valuation of 17.5. The group comprises Prudential (at 8.2), Hansard Global (11), Admiral (20.2), and Beazley (30.7).
In fact, a discounted cash flow analysis shows the stock to be around 55% undervalued. So a fair value per share would be around £5.62 a share, against the current £2.53.
This does not necessarily mean that the shares will ever reach that price. But it does further underline to me that there is still very good value left in them.
A big dividend payer too
Any share price profits will come on top of big dividend payments from the firm.
Legal & General paid 19.37p a share for 2022. Based on the current share price, this gives a yield of 7.66%.
But this will get even better. It has promised to increase the payout by 5% to the end of 2024. This would mean a 20.3385p payout, giving a yield of 8%, based on the current share price. Next year, it would mean an 8.4% payout on the same basis.
An 8.4% yield sustained over 10 years would add £8,400 to an initial £10,000 investment. Reinvesting the dividends to buy more of the stock would make another £14,002 on top of the £8,400 over the same period.
This assumes the yield averages the same over 10 years. It also does not include tax paid according to individual circumstances.
Will I miss out by not buying more?
Greed for ever-greater profits and fear of losing out are the two key reasons why investors lose money, in my experience.
I already hold the stock at an excellent price, so I will stick with that.
But if I did not have the shares, I would absolutely buy them now for three key reasons.
First, the business looks set for strong growth. Second, the stock is very undervalued against its peers. And third, the yield is excellent.
The post Will I lose out if I don’t buy more of this FTSE 100 dividend star? appeared first on The Motley Fool UK.
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Simon Watkins has positions in Legal & General Group Plc. The Motley Fool UK has recommended Admiral Group Plc and Prudential 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.
