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Demographic trends should support insurance and asset management firm
Thursday 28 Sep 2017 Author: David Stevenson

Investors interested in well-known names that pay good dividends but put off by sky high valuations need look no further than Legal & General (LGEN).

The company offers a ‘one-stop-shop’ for an ageing population in developed nations by offering pensions, insurance, investments and savings products. A part of this offering is made through the company’s asset management division Legal & General Investment Management (LGIM).


Boost from increase in mortality rate

Changes to the mortality rate aided Legal & General’s profits in the first half to 30 June, enjoying a 27% lift to £988m. While there has historically been an upward trend of people living longer in developed nations, this has now stalled and deaths have risen perhaps due to unhealthy lifestyles and social inequality.

This spike in mortality rates caused Legal & General in August to release £126m of reserves  which would have been used for customers’ pensions. Barrie Cornes, analyst at Panmure Gordon, believes this will continue into the second half and beyond. Cornes expects a further £175m release in the second half of 2017 and £250m over the next two years.

The company has also been aided by a decrease in its effective tax rate which has been reduced to 18.1% from 23%.

This has led Cornes to upgrade pre-tax operating profit forecast by 14% for 2017 and 2018 at £2.01bn and £2.16bn respectively.

The growth in LGIM bodes well for the future. The asset manager enjoyed a 126% increase in external inflows into its products in the first half of the year with its assets under management hitting £951.1bn.

All in the numbers

It’s when you drill down into the numbers that the company starts to look interesting for income and value investors.

Based on Panmure Gordon’s forecasts, Legal & General is trading on 9.3 times 2018’s forecasted earnings of 28p, and has a 6.4% prospective dividend yield. This puts the company on a quite a discount to its peers and looks an attractive proposition.

One major difference between Legal & General and its rivals which may account for this discount is that the company is buying up annuity books which others are keen to shift. Companies such as Prudential (PRU) are instead focusing on high growth markets such as Asia. Prudential trades on 11.2 times forecast earnings for 2018.

Panmure’s price target of 325p for Legal & General implies 27% upside from the current share price.


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