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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Legal & General, Impax Asset Management and Dollar Tree all look attractive
Thursday 31 Mar 2022 Author: Daniel Coatsworth

By Daniel Coatsworth, Mark Gardner, Ian Conway and James Crux

It’s your final chance to make the most of the £20,000 ISA allowance for the 2021/22 tax year and we’ve got three quality investment ideas for those seeking last minute inspiration.

The beauty of ISAs is you don’t pay any tax on capital gains or income from investments inside the account.

Even if you aren’t ready to put more money into the markets, simply adding any spare cash into the ISA before the end of the tax year on 5 April means that money will be ready to qualify for future tax-free gains.

Our three stock ideas in this article should appeal to someone wanting to buy a slice of a great business.

Legal & General (LGEN) will satisfy those seeking an attractive income stream, thanks to generous dividends.

Shares in Impax Asset Management (IPX:AIM) have fallen a lot in recent months, and we believe they’ve been oversold. Now’s your chance to pick up stock in a high-quality operator with proven skill in ESG-related investments.

Finally, US-listed Dollar Tree should benefit from the inflationary backdrop as we should see more people trade down to cheaper goods, which is its area of expertise.

You can invest up to £20,000 across Stocks and Shares, Cash and Innovative Finance ISAs in a tax year.

Lifetime ISAs have a limit of £4,000 a year, and this allowance counts towards the overall £20,000 annual ISA limit if you’re also using Stocks and Shares, Cash and/or Innovative Finance ISAs. You can put money into one of each kind of ISA each tax year.

Junior ISA accounts are available for children under 18 and have a limit of £9,000 a year.

Legal & General (LGEN) 272.1p

Legal & General (LGEN) is the sort of share you want to buy and forget about, enjoying an attractive income stream for years to come.

The performance statistics are very good. Over the past five years it has delivered more twice the total return (share price gains and dividends) than the FTSE All-Share index of UK shares, at 52% versus 25% respectively, according to FE Analytics.

Over the past 10 years the outperformance is even greater, with Legal & General generating a 266% total return versus 96% from the FTSE All-Share.

The company is a key beneficiary of the robust structural trends that continue to drive change and growth in UK life insurance. Moreover, asset management inflows remain on a positive trajectory.

The recent market sell-off has taken its toll on the group’s share price which year to date is down 9.7%. However, this presents an opportunity given the group’s attractive dividend yield and low price to earnings ratio. The stock is trading on 7 times 2023 operating earnings per share, with a 7.9% prospective dividend yield.

In the UK, the combination of an ageing population and the ongoing shift of responsibility for retirement incomes from corporates and the state to the individual should continue to fuel growth in the long-term savings market for many years to come. Critically Legal & General will be a key beneficiary of this trend.

Since 2012, when Nigel Wilson took over as CEO of Legal & General, the group has been focused on cash generation as well as the growth opportunities in the UK market, and increasingly the US and Asia. It has also demonstrated how life insurers’ balance sheets can be used to create alternative higher yielding assets, which better match the group’s liabilities.

Legal & General has a five-year plan (2020-2024) to generate £8 billion to £9 billion of cash and capital. To date, it has delivered £3.2 billon of cash generation and £3.1 of capital generation, implying it is well on target to deliver as promised. This would also suggest the group’s ambition to achieve 3% to 6% compound annual dividend growth up to 2024 is achievable.

The company is the largest beneficiary among the UK life sector to any interest rate rises with respect to its solvency ratio. This is particularly relevant given the recent announcement that consumer prices in the UK rose by 6.2% in the year to February. This was up from 5.5% in January and marks the biggest inflation reading since March 1992.

‘Unlike most sectors, life insurance companies are positively correlated to interest rate movements,’ says CI Global Asset Management. ‘One reason is that insurers often reinvest policyholder premiums into bond instruments, allowing them to profit when (government bond) yields increase.’ [MGar]


Impax Asset Management(IPX:AIM) 906p

One of the most striking reactions to the invasion of Ukraine has been the speed with which big businesses, including oil firms, have distanced themselves from Russia.

In previous conflicts there was little prospect of companies shying away from or ceasing trading with aggressor nations.

Today, with social and governance issues ingrained among companies and their stakeholders, the need to be seen as a good corporate citizen has meant many companies have wasted no time in cutting ties with the Putin regime.

The conflict has also had ripple effects on energy and other commodity prices, reinforcing the long-standing call from environmentalists to invest more in alternative sources of energy and food if we are to avoid supply shocks as well as protect the planet.

In summary, ESG (environmental, social and governance) investing has never been more relevant than it is today and flows into fully accredited ESG funds are only going to increase.

Having launched in 1998, Impax Asset Management (IPX:AIM) was well ahead of the pack when it comes to sustainable and ESG investing.

Most of the money it runs is institutional, but in the last couple of years the company’s shares and its retail investment funds have become increasingly popular with small investors.

In the 12 months to last September the company enjoyed net inflows of £10.6 billion for its funds.

At the same time, performance gains added £6.3 billion, meaning total assets for the year rose to £37.5 billion or 84% more than in the year to September 2020.

Impax’s track record has also drawn the attention of other asset management firms, who have adopted the mantra of ‘if you can’t beat ‘em, join ‘em’ and taken sizeable equity stakes in the business.

Together Aberden Standard Investments, BlackRock, Janus Henderson and Liontrust (LIO) own over a quarter of the firm, while original backer BNP Paribas still holds roughly a 14% stake.

Management also have significant ‘skin in the game’, with the employee trust owning 10.6% and co-founder and chief executive Iain Simm owning a 7% stake.

The shares, which hit an all-time high close to £15 at the end of last year, are now trading at just over 900p after having nearly halved in two months.

This is despite the firm posting an 11% increase in assets in the final quarter of 2021 to £41.4 billion as investors continued to flock to its industry-leading offering.

This is a golden opportunity to buy into a great ESG manager at a sizeable discount in a market which has many years of growth ahead of it. [IC]


Dollar Tree $154.25

One way to protect your portfolio from the rampant inflation taking hold around the globe and the risk of an international recession is to buy discount retailers that can capitalise as cash-strapped consumers tighten their belts and trade down to cheaper brands in tough times.

A savvy way to play the cost-of-living squeeze in North America is US-listed Dollar Tree, the Virginia-headquartered discount variety stores operator that has generated double digit earnings growth each year for the past decade.

This success is despite the poorly managed integration of general merchandise discounter Family Dollar, the rival operator with a slightly different pricing model acquired in 2015, and more recently, the impact of soaring freight cost inflation on the business.

Shares in Dollar Tree, with thousands of stores across the US and Canada selling everything from budget clothing and cleaning products to snacks, drinks, toys and pet food, are currently testing all-time highs.

Fourth quarter results revealed a 4.6% sales increase to almost $7.1 billion.

A recent boardroom revamp following pressure from activist Mantle Ridge that saw Richard Dreiling, a former CEO of arch-rival Dollar General, drafted in as executive chairman, went down well with investors.

Share price strength has left the shares trading on a 12-month forecast rolling price to earnings ratio of 19.3 according to Stockopedia. Though this appears rather rich for a retailer, a price to earnings growth ratio of 0.8 suggests the shares are good value relative to the growth expectations. A PEG ratio below 1 is considered very attractive.

Shares notes Dollar Tree is seeing positive earnings revisions for the financial years to January 2023 and 2024, based on Stockopedia data.

Whilst many consumers in the US boast strong balance sheets after accumulating savings during the pandemic, inflationary pressures including the rising cost of fuel are pressuring finances and should drive more shoppers to Dollar Tree in a bid to save money.

Focused on providing extreme value, Dollar Tree has effectively raised prices with a successful conversion to a $1.25 price point across all its Dollar Tree outlets in the US, which should enhance its earnings.

Besides boosting an ability to expand its ranges, introduce new products and sizes, the new pricing strategy has enabled the retailer to reintroduce many customer favourites and footfall-driving products it had stopped selling due to the constraints of the previous $1 price point.

Its Family Dollar chain, which sells many products for $1 or less with most items priced below $10, should benefit from store renovations in the current year. It is also set fair for market share gains in straitened times. [JC]

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