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Legal & General - Growth remains robust, with dividends up

Nicholas Hyett | 6 March 2019 | A A A
Legal & General - Growth remains robust, with dividends up

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Legal & General Group plc Ord 2.5p Shares

Sell: 280.10 | Buy: 280.30 | Change -8.10 (-2.81%)
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Underlying profits rose 10% in 2018 to £1.9bn, with growth across all the major divisions. The board has recommended a final dividend of 11.82p - up 7% on the previous year.

The shares fell 3.5% in early trading, as capital generation came in slightly behind expectations.

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Our view

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

Last year it became the UK's first £1trn investment manager, with a leading position in low cost investment products. That's seen it become the UK's largest defined contribution pension manager following the introduction of auto-enrolment, with 3.1m workplace customers on its books.

Changes to pension rules in 2014 demolished L&G's annuity sales, but they're growing again, with its market share of individual annuities has almost tripled since 2016. Meanwhile demand for the group's bulk annuity and liability-driven investment products should remain strong, as companies seek to de-risk existing final salary pension schemes. The UK market for these products is worth an estimated £2trn alone.

But while the UK is still the group's centre of gravity (and with current economic headwinds that could yet prove a problem), international expansion is also gathering pace. International flows accounted for 43% of investment management net inflows in 2018, while the US final salary market is worth an estimated $3.5bn, and demand for de-risking solutions is growing rapidly.

Recent times have seen the group benefit from life expectancy failing to increase at the pace actuaries had been expecting, and the cost of servicing annuities falling as a result. Those one off-gains will be fleeting, but the trend looks set to continue in the short term at least.

Among the areas the group is looking to grow longer term is Lifetime Mortgages.

These equity release deals allow customers to take money out of their house while continuing to live there, with the loan only repaid on the borrower's death or house's sale. Growth has been spectacular - rising from nothing to £1.2bn of advances per annum in just four years. A low average loan-to-value provides some assurance the group hasn't been over reaching itself, but it's still an emerging sector, and new sectors can come with unexpected risks. We'll be keeping a close eye on it.

Longer term, we think L&G is well set, operating in markets which benefit from wider economic and demographic trends. We feel the group's capital position is solid, and the shares offer an attractive prospective yield of 6.1%. Analysts expect steady dividend increases from here - although as ever dividends are variable and not guaranteed.

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Full Year Results

The Legal & General Retirement division remains the largest contributor to group, with operating profits of £1.1bn in 2018, up 22%.

That includes £832m from the Institutional Retirement business, a 16% increase on 2017. Performance was boosted an increase in pension risk transfer deals completed during the year, covering £9.1bn of annuities. Legal & General had a 38% market share in the UK bulk annuities market this year, and has continued to grow in the US and now Ireland.

The retail retirement business reported a 42% increase in operating profits, to £283m, with lifetime mortgage advances up 19% and individual annuity sales rising 18%.

Across both retirement business Legal & General saw mortality releases of £433m as mortality releases continued to come in ahead of expectations.

Legal & General Investment Management saw operating profit rise 2% to £407m, as total Assets Under Management rose 3% and moved through the £1trn mark. Net inflows during the year rose 13%, of which nearly half was from international investors.

Legal & General Capital saw operating profits rise 18% to £322m. That was driven by a 63% increase in the size of the direct investing portfolio following the acquisition of CALA homes.

Legal & General Insurance saw operating profits rise 2% to £308m, with good results in the UK offsetting a weaker US market. Total premiums rose 2% to £2.6bn.

The group finished the year with a Solvency II ratio (a key measure of insurers capitalisation) of 188%, compared to 189% in 2017. That was below the 194% expected by analysts.

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The author holds shares in Legal & General.

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.