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Legal & General - dividend raised as cash generation jumps

First half underlying operating profit rose 8% to £1.2bn.

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First half underlying operating profit rose 8% to £1.2bn. That reflected growth across all divisions, except Investment Management which was impacted by challenging market conditions.

Progress toward the five year financial targets remains on track and the group is confident it can ''deliver further profitable growth going forwards''.

The board announced an interim dividend of 5.44p per share, up 5% year-on-year.

The shares were broadly flat following the announcement.

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Our view

Legal & General is one of few companies that stands to benefit from rising interest rates, market volatility and increased credit spreads. That's because a major part of the business is its pension risk transfers (PRTs).

These see Legal & General take on responsibility for paying some, or all, of the pensions from a company's final salary pension scheme (often called bulk annuities). In return the group receives a lump sum. That's then managed by Legal & General Investment Management (LGIM) and underpinned with real assets developed by the Capital division (which includes UK housing and infrastructure projects). LGIM's low-cost tracker and liability driven investment strategies are also popular with other final salary pension schemes, who often become future bulk annuity customers.

This business model has a major competitive advantage, since replicating all the various areas of expertise is difficult and time consuming. Plus, the end markets to which the group is exposed offer long term opportunities.

Demand for bulk annuities is growing , and as well as a dominant UK position, L&G is increasing activity in overseas markets like the US and Canada. The first half saw completion of its largest US deal to date and the market's huge, with $3.8tn of defined benefit pension schemes and only around 7% that have already moved to insurance companies like Legal & General. It's a small fish for now, with $7bn of Pension Risk Transfer (PRT) written since 2015 and a target of $10bn over 2020-2024 - but the opportunity is big.

International customers are accounting for an increasingly large slice of the assets under management in LGIM too, reducing reliance on UK savers. Despite turmoil in global markets AUM only fell 3% over the first half. More importantly, external net inflows reached record levels with continued growth in higher margin areas such as thematic ETFs.

We'd be remiss not to mention the group's formidable solvency II ratio though, which is a core measure of capitalisation. At well north of 200%, this offers the group some resilience from adverse economic developments.

Though, that doesn't make it immune to pressures. A sharp fall in equity or property markets would have a negative impact on the group's solvency ratio. As would the impact of interest rates being lowered in future, which is a possibility if inflation tapers, and economic growth needs some stimulus.

We also note that a core measure, cash generation, was up 22% and group surplus capital was up just shy of £1.0bn over the half, which supports plans to grow the dividend by 3-6% a year and offers wiggle room for investment in high growth opportunities. No dividend is ever guaranteed.

We think a focus on growth is the right decision in the long term - especially as competitors are increasingly keen to muscle in on the bulk annuity business. The 7%+ prospective dividend yield should still be enough to keep shareholders happy - although as ever the dividend cannot be guaranteed.

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half Year Results (operating profit is underlying)

Legal & General Institutional Retirement reported operating profit growth of 7%, to £560m. That was driven by the performance of the annuity portfolio, supported by strong global pension risk transfer (PRT) new business volumes of £4.4bn, up from £3.1bn.

Operating profit rose 14% in Retail, to £332m. That was driven by cash generation from the growing UK protection and individual annuity portfolios. Individual annuity sales fell from £483m to £453m, as retirees look to delay decisions given the uncertain environment. In the US, after significant claims over the first quarter, mortality returned to normal levels in the second.

Legal & General Capital increased operating profit by 5%, to £263m. That reflects profit from the alternative asset portfolio of £202m, up from £195m, benefiting largely from an increase in residential property values.

Legal & General Investment Management felt the effects of recent market volatility, with operating profit down from £204m to £200m. Assets under management fell 3% to £1.3tn, despite record external net flows. Management fee revenue increased rose from £471m to £485m, reflecting the strong flows.

The group's Solvency II ratio, a key measure of insurers capitalisation, came in at 212%, up from 182%. Net release from operations, a measure of cash generation, rose 22% to £1.0bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 9th August 2022