Financial services specialist and major dividend stock Legal & General (LSE: LGEN) is to halt new production at its modular housing factory, we learned a week ago. This news appears to have been taken badly by the market, with the shares losing some recent gains. Overall this year, they are down well over 10%.
However, the announcement and the resultant share price drop are enormously positive for me.
No business like the housing business
I am not a big fan of companies trying to do lots of different things. In my experience, they end up doing none of them well.
Why is Legal & General in the housing business in the first place I might well ask? One of its business segments — Legal & General Capital (LGC) – is a clean energy transition investor. This latest foray into building prefabricated housing modules runs in tandem with its other clean-energy developments.
Predictably enough, given its lack of experience in the housebuilding market, Legal & General has come a cropper. Production at its flagship modular housing factory in Leeds has been suspended while it reviews its options. The number one option should be to stop doing it and stick to what it’s good at, I feel.
Quite aside from anything else, the housing market in the UK looks fragile to me. Inflation remains so high that the Bank of England raised its benchmark interest rate again last week to 4.5%.
The analyst consensus is that rates may not go any higher, but analysts are frequently wrong. Even if they are right this time, rates do not look like they will come down any time soon.
This means that there is no hurry from prospective buyers to land themselves with a high-interest mortgage now.
Core businesses are strong
For me, Legal & General’s pullback from the modular housing business implies that it will focus again on the fundamentals. And these are excellent.
From the start of its five-year plan in 2020 to the end of 2022, it has achieved £5.1bn of cash generation and £4.9bn of cumulative capital generation. It stated in its 2022 results that even zero growth in both metrics from now to 2024 would allow it to generate £8bn-£9bn in cumulative cash and capital. Another sign of balance sheet strength is the company’s Solvency II ratio rising to 236% in 2022, from 187% in 2021.
There look to me like huge opportunities to be had for its Legal & General Retail Investments retirement business too. It is a leader in the UK Pension Risk Transfer (PRT) market, in which companies outsource their pension commitments. And it is in the Top 10 in the US PRT market as well.
Legal & General Investment Management also remains a leading global asset manager. It is ranked 11th in the world, with £1.2trn of assets under management.
And on top of this potential growth, Legal & General is still a star dividend stock in the FTSE 100. Its dividend yield in 2022 was 7.8%, in 2021 it was 6.2%, and in 2020 it was 6.6%. In 2019 and 2018 these payouts were 5.8% and 7.1%, respectively.
I already have positions in the company. If I did not, then I would buy the shares right now without any hesitation.
The post After its housing pullback, is this star dividend stock a stronger buy? 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 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.