I’ve owned Legal & General (LSE: LGEN) shares in the past.
I can’t remember why I sold, but I’m sure now that it was a bad move.
But how can I think Legal & General is a defensive stock, with such a volatile share price? I mean, just look how it fell in the 2020 stock market crash.
What are defensive stocks?
When we think of safe stocks, things like Unilever or Tesco, come to mind. They have low volatility and their share prices tend not to move too much.
But insurance and investment stocks can be among the most volatile. They can swing from year to year, or even month to month.
But you know what? We should expect that. It’s the way the business works. This is a sector that, above all else, needs to be seen with a very long-term outlook. And then it can look steady.
Long-term essentials
Looking to hold for 10 or 20 years, I think Legal & General qualifies. It has two of the key things I want from defensive stocks.
It provides essential services. Profits might vary in the short term. But it’s a key part of the finance sector, and business just can’t manage without it.
And I want to see a cash cow. I think we’re looking at that here, for sure.
Strong cash flow
For the first half of 2023, the firm reported £947m in capital generation, with “significant” dividend headroom. And that’s after raising the dividend by 5% — and the forecast FY yield stands at a whopping 7.8%.
On the board’s five-year plans for 2020–2024, we’ve already see £5.9bn in capital generation, with a net surplus over dividends of £0.6bn.
Legal & General has a solid record of raising its dividends, but what might it bring home over the years?
In a Stocks and Shares ISA
A single ISA allowance of £20,000 put into the stock could grow to £90,500 in 20 years. That’s if the dividend stays at 7.8%, and it’s all used to buy more shares.
In reality, I’d expect to invest smaller sums, but at regular intervals. And if the firm can keep lifting the dividends as it’s been doing for years, we could see more income and some share price rises.
Now, there are risks here, for sure. One of them is that it looks like 2023 FY profit could be a bit squeezed. And it might not cover the expected dividend by much.
Any pressure on the dividend in the next few years could give the shares a kicking.
Weak sentiment
The other thing is that stocks like this are just not popular in tough economic times, like now. We’ve seen the share price fade over the past couple of years. It’s picked up a bit as we get into 2024, mind.
I think we could well have more erratic times ahead, with short-term share price falls.
But over the very long term, I do rate Legal & General as steady and defensive. I should buy some again.
The post Legal & General: defensive, steady shares with long-term dividend growth appeared first on The Motley Fool UK.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc and Unilever 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.
