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I have been eyeing Legal & General (LSE: LGEN) shares as a potential addition to my portfolio for a while. Has my hesitation cost me? Yes and no. The Legal & General share price has gone precisely nowhere over the past year, falling by less than 0.1% over those 12 months.
But sitting on the sidelines means I do not get any dividends from the FTSE 100 financial services powerhouse.
Given that it currently offers a 9.1% dividend yield – over two-and-a-half times the FTSE 100 average – that potential passive income grabs my attention.
Strong business, limited growth levels
Let’s start with the share price.
While it has done nothing in the past year, that only tells part of the story. Over five years, it is up 20%.
That is solid, but is flattered by the the half-decade starting when the market was still weak in the early stages of the pandemic. The wider FTSE 100 has risen 47% during those five years, so Legal and General significantly underperformed the flagship index.
I also see limited obvious drivers that I would expect to boost the Legal & General share price in coming years.
It has a well-proven business model, large customer base and operates in a market that has high, resilient long-term demand. All of those things I see as strengths.
But, the company’s profits have been markedly weaker over the past several years. Last year was the third in a row of falling net profit. At £191m, it was less than a tenth of what it had been three years before.
Meanwhile, selling a large US business will remove that as a possible future source of revenue or earnings. On the upside though, it should generate cash that can fund a share buyback.
I am generally not a huge fan of buybacks as an investor and would prefer a special dividend. Depending on the price paid though, a buyback can boost earnings per share and help justify a higher share price.
On balance, I would not buy Legal & General shares for my portfolio right now based only on the share price growth prospects.
High-yield, but with risks
Could the dividend be enough to persuade me to dive in?
I do think the stock is attractive. There has only been one year since the 2008 financial crisis that did not see Legal & General raising its dividend per share. It has announced plans to cut that growth to 2% a year versus 5% in recent years – but that is still growth.
With the yield already standing at over 9%, I find that an attractive proposition.
However, dividends are never guaranteed. Legal & General cut its payout per share during the financial crisis and if we see another sharp fall in the markets leading policyholders to pull out money, there is a risk of another dividend cut.
I reckon there are potentially some great high-yield shares with strong price growth potential in today’s market.
Although I like its yield, the Legal & General share price growth potential as I see it right now does not motivate me enough to invest.
