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The Legal & General (LSE: LGEN) share price has risen 12% so far in 2025. That sounds good, but it’s pretty much bang-on the FTSE 100 performance year-to-date. So if it’s undervalued relative to the wider market, maybe nobody’s caught on yet.
A rise like that has lowered the forecast dividend yield. But it’s still up at 8.3%, with a few insurance stocks among the dividend leaders right now.
Big dividends caution
Before I consider jumping in to snap up such a big yield, something I just read raises a caution in my mind. The latest Dividend Dashboard from investment company AJ Bell reminds me there’s more to it than the yield alone.
Sometimes yields are high due to share price falls. And Legal & General’s actually declined since a peak in 2022. It’s even down a little over 10 years, which is my usual target holding period for a stock. But at least the dividend hasn’t been cut in that decade.
Healthy earnings are important for maintaining a dividend too, but even that’s not enough. We need to see dependable cash flow if we hope for progressive long-term dividends.
How does it stack?
So what do Legal & General’s dividend prospects look like in the light of performance fundamentals?
One thing that would normally make me immediately wary is weak cover by earnings. In this case, we should see the prospective dividend covered, but only just. The consensus forecast suggests only 1.1 times in 2025. That should rise to 1.2 times by 2027 if earnings growth estimates are right. But it could still seem a bit tight.
Then again, there are other factors involved with insurance companies. They typically enjoy very strong cash flow. And the solvency it can help generate can mean they just don’t need the same degree of safety margin in cover.
For the 2024 year, Legal & General reported Solvency II capital generation at £1.8bn, with a Solvency II coverage ratio of 232%. That means the company isn’t short of a few quid, not by a long way.
Shareholder returns
In the full-year statement, CEO António Simões said: “Our clear capital allocation framework supports our plan to return over £5 billion over the next three years, through dividends and buybacks.”
On top of that, the company has a long track record of raising its dividends, even through the Covid years.
But that doesn’t mean the dividend won’t ever be cut, because in a future tough year there’s a clear chance it might. The industry’s a strongly cyclical one, and that bad year could be next year.
I see a volatile share price here, significantly more than the FTSE 100. I reckon investors need steady nerves. And that 10-year holding period’s a firm minimum for me.
I’ve owned Legal & General in the past (can’t remember why I sold) but I’m definitely considering getting back in before any price rises might push the yield down further.
