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He legal and general (LSE:LGEN) share price has fallen 14% over the past year. It’s a decline that reflects investor fears that earnings could fall as the global economy slows.
After all, spending on life insurance and other financial products can drop precipitously when times get tough.
However, as a long-term investor, this fall has caught my eye. This is because Legal & General shares appear to offer excellent overall value at current prices of around 257 pence.
He FTSE 100 the company trades with a forward price-earnings (P/E) ratio of just 7.5 times. This is well below the 13.5 times average for the London First Class Index.
And Legal & General’s dividend yield for 2023 sits at a whopping 8%. It’s a reading that’s more than double the FTSE index average of 3.7%.
a harsh environment
Of course, some stocks trade low for a reason. Low valuations are common among high-risk stocks and this UK stock faces considerable hurdles of its own.
And as I say, demand for the types of products that Legal & General sells can drop when consumers feel the pressure. The concern for the FTSE 100 company is that the global economy could also underperform in 2023. By extension, current earnings (and possibly dividend) forecasts for the company could be in serious jeopardy.
Today Saadia Zahidi, Managing Director of the World Economic Forum, reminded the audience in Davos that “the world economy is in a precarious position”. A survey of analysts by the agency also showed that most now expect a global recession this year.
structural opportunities
However, this is a risk I would be willing to take. As a long-term investor, I think the chances of Legal & General stock generating a strong return are very high.
First, the business is strongly positioned to capitalize on two structural trends. People are becoming more financially savvy and therefore sales of investment, retirement and insurance products are increasing.
In addition, the size of the senior populations in Legal & General’s key US and European markets is growing rapidly. Therefore, the company can expect sales of its pensions, annuities, principal release mortgages, and other retirement products to soar specifically in the coming decades.
Balance Sheet Benefits
I also like Legal & General for its excellent track record of generating cash. As an income investor, this is particularly encouraging, as it gives additional strength to dividend forecasts. The firm’s Solvency II capital ratio was between 225% and 230% two months ago.
Its cash-rich balance sheet also gives the company greater scope for acquisitions and investments to fuel long-term growth. Last year, the company made its first investment in the US to create a real estate platform in the life sciences, research and technology industries. It has the financial ammunition to make more major investments in growth areas like housing and the green economy as well.
Overall, I think Legal & General stock might be too cheap to lose at this point.