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Legal & General - Steady performance across the board

Nicholas Hyett | 8 March 2017 | A A A
Legal & General - Steady performance across the board

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Legal & General Group plc Ord 2.5p Shares

Sell: 285.50 | Buy: 285.70 | Change 3.70 (1.31%)
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Legal & General's broadly in line results saw operating profits rise 11% to £1.6bn in 2016. The group has announced a final dividend of 10.35p, up 4% on the year before and contributing to a 7% increase in the full year payment.

The shares rose 1% following the announcement.

Our View

Legal & General is a market leader in the provision of low cost investment products and services, having been an early entrant into the tracker funds market and subsequently building up a substantial passive investments business.

L&G serves markets with a lot of inherent growth potential. Auto-enrolment has seen the number of defined contribution schemes the group supports more than double this year, and by 2018 the vast majority of employees will, by law, have to have been signed up to some sort of scheme. Contributions from auto-enrolled members should rise strongly over the next few years and there is plenty of scope to sign up new schemes too. An extra £17bn of new money is expected to flow into workplace pensions by 2019/20.

Changes to pension rules have diminished the significance of L&G's individual annuity sales. However, demand for L&G's bulk annuity schemes and liability-driven investment products should remain strong, as more companies seek to de-risk their existing defined benefit (DB) pension schemes. The UK DB market alone is worth an estimated £2,000 billion.

International expansion should open up further opportunities for the group. US net inflows riose 49% in the investment management division, with increases in flows from European and the Middle East as well. The US defined benefit market is four times larger than the UK, and demand for the de-risking solutions L&G offers is growing rapidly. Building on the 6 bulk annuity deals signed in 2016 will give the group an important foothold in this market, and the opportunity to grow its market share.

2016's earnings mix will be a little disappointing for investors, with L&G Retirement delivering the bulk of growth. The investment management business, which struggled to grow profits, is capital-light and generates recurring income, whereas annuity revenues have become lumpier as the group increasingly relies on blockbuster bulk annuity deals. A more balanced spread of earnings growth would be welcome going forwards.

Volatile financial markets can be tricky for banks and insurers in the short term, since many of their assets are linked to market investments. But L&G appears well set, with a focus on long term structural growth opportunities and an attractive prospective yield of 6% , which is forecast to rise to 6.4% by FY18.

Full Year Results

Profits grew across all Legal & General's major business units, with earnings per share up 19% to 22.2p. Return on equity across 2016 was 19.6%.

Legal & General Retirement, which sells annuities and other retirement products, increased operating profits by 27% to £811m. Total annuity assets increased 25% to £54.4bn, with total new business up 190% to £8.5bn. The strong performance reflects growing demand for the group's de-risking strategies, where it takes on longevity risk for existing final salary schemes, as well as a 16% increase in annuity sales to individuals.

The group's asset management business Legal & General Investment Management saw operating profits grow 3% to £366m. The division saw net inflows of £29.2bn, with £9.4bn from the US, and total AUM growing 19.8% to £894.2bn.

Legal & General Capital, the group's direct investment business, delivered operating profits of £257m (up 10%) as the division saw strong performance across its UK Housing, Infrastructure and SME finance portfolios.

Legal & General's insurance and legacy savings business delivered a combined profit of £468m. Operating profits in insurance were broadly flat, with a 7.5% decline at the group's savings operation as the group continued to manage the decline of this mature portfolio.

The group's Solvency II surplus, a measure of regulatory capital, rose £0.4bn in the second half to £5.7bn, leaving the group with a Solvency coverage ratio of 171%.

CEO Nigel Wilson commented:

"We look forward to the future with confidence as our core markets are growing, our market share is increasing, our balance sheet is strong and we have positive cash and earnings momentum."

The author of this article holds shares in this stock.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.