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Legal & General - Generally solid results

Nicholas Hyett | 9 August 2017 | A A A
Legal & General - Generally solid results

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Legal & General Group plc Ord 2.5p Shares

Sell: 287.80 | Buy: 288.00 | Change 2.00 (0.70%)
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Legal & General (L&G) saw a significant rise in operating profits in the first half, up 27% to £1bn, with progress across all divisions.

The board declared an interim dividend of 4.3p, 7.5% ahead of the prior year interim, and in line with the new dividend policy of paying out 30% of the previous year's full year dividend at the half year.

The shares were broadly flat following the announcement.

Our View

Legal & General serves markets with a lot of growth potential.

It 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 business in this area.

Auto-enrolment has seen the group become the UK's largest defined contribution pension manager, with Workplace customer numbers increasing 20% this half. By 2018, the vast majority of employees will, by law, have to have been signed up to some sort of scheme, and 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 £2trn.

While the UK remains the group's centre of gravity, and with current economic headwinds that could yet prove a problem, international expansion should open up further opportunities. International flows accounted for 90% of net inflows in LGIM this half while the US defined benefit market is four times larger than the UK, and demand for de-risking solutions is growing rapidly. L&G completed 3 small bulk annuity deals in the first half, building on the 6 signed in 2016, as it looks to develop a foothold across the pond.

However, earnings mix has been a little disappointing for investors, with L&G Retirement delivering the bulk of growth, boosted by one off releases. The investment management business, where profit growth has been slower, 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 growth would be welcome going forwards.

Longer term L&G appears well set, operating in markets which benefit from wider economic and demographic trends. The capital position is solid, with a Solvency II ratio of 186%, while offering an attractive prospective yield of 5.5%, with analysts expecting steady dividend increases from here.

Half Year Results

At £566m, Legal & General Retirement (LGR), continues to deliver the bulk of operating profits. A 40% increase in first half operating profit reflects a £126m mortality release, as the group altered its assumptions to reflect a higher than expected rate of mortality. Excluding this release, operating profits in LGR rose 9%.

Legal & General continues to see demand for its corporate Pension Risk Transfer offering, completing £1.6bn of bulk annuity transactions plus an £800m longevity insurance transaction in the half. Activity is expected to increase in the second quarter, and L&G is currently quoting on £12bn of UK deals. In retail, individual annuity sales rose 118% to £345m, with LGR Retail now managing over £21bn of assets for 550,000 individual customers.

Legal & General Investment Management (LGIM) saw operating profits rise 13% to £194m, as assets under management rose 13% to £951.1bn, following net inflows of £21.7bn.

The direct investment business, Legal & General Capital, saw operating profits rise 5% to £142m. That reflects a particularly strong performance from the traded portfolio, where profits rose 24%. Profits of £151m at Legal & General Insurance remained flat.

L&G continues to target earnings per share growth of 10% per annum, and net release from operations by 10% per annum, from 2016-2020.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.