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Legal & General (LSE: LGEN) shares have had a rocky start to 2025, but this turbulence isn’t due to company performance.
The FTSE 100 insurer’s latest market update on 4 December was positive, with the board confirming it was “on track to deliver mid-single-digit growth in operating profit for FY24”. It also projected a 6-9% compound annual growth rate (CAGR) in core operating earnings per share through to 2027.
The shares jumped 5% on the day, prompting me to write, a little breathlessly: “I love my Legal & General shares even more after today’s exciting update.”
However, the shares have since returned to prior levels as investors face the reality of persistent inflation. Markets anticipated six interest rate cuts in 2024 but saw only two. Analysts expect just one or two cuts in 2025, as Donald Trump’s tax cuts and trade tariffs may drive inflation higher.
Can this UK income stock offer growth too?
Higher interest rates hit dividend stocks like Legal & General by boosting the yields on lower risk asset classes such as bonds and cash.
Despite this, Legal & General remains a rock solid blue-chip with loyal customers, rising revenues, and a significant new opportunity in the bulk annuity market. The company isn’t about to disappear, taking investors’ money with it. But that doesn’t stop the shares from being volatile in the shorter run.
Over the last year, the Legal & General share price has dropped 12% and is down 28% over five years. While the bumper dividend yield of more than 9% cushions the blow, it’s still disappointing. I expect the shares to rebound when rates eventually fall, though that might take longer than I hoped in December.
In the meantime, investors benefit from a fabulous trailing dividend yield of 9.3%. That’s now forecast to climb to 9.8% this year. Although it’s only covered 1.1 times by earnings when I’d ideally prefer cover of two, it appears safe. The board anticipates generating enough cash to maintain and slightly increase dividends. It forecasts cumulative Solvency II capital generation of £5bn-£6bn by 2027.
All this and buybacks too!
There’s even talk of returning more capital to shareholders via a potential share buyback in March, though nothing’s guaranteed. Investing £10,000 in Legal & General today could deliver £980 in annual income, with any share price growth as an added bonus.
Will this materialise? The 17 analysts offering one-year share price forecasts predict a median target of 262p. That implies a 20% rise from today’s 219p. Combined with the yield, this could deliver a total return of nearly 30%. Time will tell.
Nine of the 18 analysts following Legal & General rate it a Strong Buy, while only one suggests selling. Yet risks remain. The shares trade at an elevated 29.87 times earnings, and the competitive bulk annuity market poses challenges. Plenty of insurers are targeting the same opportunity. There’s also the risk of actuarial miscalculations wiping out narrow margins.
Additionally, personal lifetime annuity sales are likely to dip when interest rates fall. That could offset some of the benefits of lower rates.
With a long-term perspective, I see Legal & General as a brilliant buy-and-hold prospect for me and one for other investors to consider. I’m reinvesting all the dividends I receive at today’s lower price, while waiting for market conditions to swing back in its favour.
