An underwhelming share price performance over recent times has come against heightened expectations, but seen through the prism of the longer-term in which Legal & General (LON:) operates, the plan is clearly coming together.
L&G is in a new phase, executing at pace and announced a 143% rise in pre-tax profit to £807 million, alongside 6% growth in core operating profit to £1.62 billion, albeit slightly shy of the expected £1.65 billion, which has been taken by investors as a source of disappointment. Elsewhere, the group’s strategy is now playing out, with the previously announced non-core sales of its US Protection business for £1.8 billion and Cala for £1.35 billion. Separately the group also acquired Proprium Capital Partners, enhancing its capabilities in key growth markets and secured a long-term partnership with Blackstone to underpin its credit platforms.
Indeed, the group’s financial strength enabled a target of some £5 billion to be returned between 2025 and 2027 in dividends and buybacks. The announcement of a £1.2 billion share buyback programme is as expected, comprising £1 billion of proceeds from the US Protection business sale and £200 million from its recurring annual distribution policy.
In addition, and in line with its announced growth target, a projected dividend yield of 8.4% is at a heady level, paying investors handsomely to wait as the strategy unfolds. As such, the stock has become something of an income-seeker’s favourite over recent times, with the yield being the highest to be found within the FTSE100.
In the meantime, the group is making strides as it enters its new phase. Each of the core units made significant if slightly separate contributions, led by the main Institutional Retirement business where core operating profit rose by 6% to £1.17 billion, bolstered by £11.8 billion of global Pension Risk Transfers (PRT) being written, £10.4 billion of which emanated from the UK and where the pipeline remains healthy. Asset Management revenues rose by 4% and the unit now houses global Assets Under Management of £1.2 trillion, with a shift emerging towards higher margin products. Retail core operating profit grew by 4% to £447 million, where Workplace Defined Contributions AUA (Assets Under Administration) rose by 21% to £114 billion.
Perhaps the shining light for the group is the self-feeding, virtuous circle which is created by its sprawling and largely interconnected businesses. The structure of the group allows the generation of assets through its bulk annuity, or PRT business, to then be managed by other parts of the group. Indeed, such is the dependency and connection between the units, a multi-decade customer relationship is usually achieved as the customer switches between requirements as time passes, from the initial investment and growth stage to the drawdown and withdrawal chapter.
As such, the reliability of the relationship and the ongoing fees enables a certain visibility of earnings over the longer term. Indeed, the group’s store of future profit, including the CSM (Contractual Service Margin) is a measure of profit which will be released over time given the nature of investment and insurance products. In this period the store of future profit rose to £13.3 billion, including CSM of £12.4 billion.
For all the progress, the share price has underwhelmed. Over the last year, the price has risen by 5.5% during which time the wider added 22.6%, and the shares are down by 15% since the record high achieved in January 2020. There is little doubt as to the longer-term potential for the savings and investment market, especially given ageing demographics and likely welfare reform, while the growing demand for retirement income is another tantalising string in the group’s bow. It now remains to be seen whether these numbers entice unconvinced investors back into the fold, where the market consensus of the shares as a hold has been in place for some time, although the initial price reaction suggests that there remains more work to do.