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It’s hard to choose my absolute favorite. FTSE 100 shares, but a portfolio stake seems pretty unbeatable these days. It combines a dirt-cheap valuation with ultra-high yield and few of the risks you’d expect with that heady combination.
The stock in question is an insurer and fund manager. Legal and General Group, (LSE: LGEN). I like it so much that I made two purchases over the summer and I’m looking forward to buying more.
A favored portfolio
This blue-chip name has been a household name for as long as I can remember, but lately it seems to have fallen off investors’ radar screens. The same is true for other FTSE 100 insurers and asset managers. Aviva, Phoenix group holdings and M&G. They are all cheap and offer massive returns.
The troubles of recent years have weighed heavily on its share prices, as the pandemic, war and cost of living crisis brought everyone down. The sector should generally perform better when the stock market is rising, as this will increase assets under management and drive client inflows as investors return.
Legal & General’s share price has fallen 16.45% in the last five years. Measured over 12 months, it has risen 4.71%, but has recently fallen again.
At The Fool, we like to buy stocks backed by a strong underlying business that has been affected by widespread market volatility. I think L&G fits that description very well.
On August 15, it reported an operating profit of £941m, which was a slight drop from £958m a year earlier, but respectable given current concerns. It has a super-solid Solvency II coverage ratio of 230%, up from 212% in 2022.
Despite that, it trades at a valuation you might expect from a company in deep trouble: just 5.8 times earnings. That’s less than half the FTSE 100’s current average valuation of 12 times.
I don’t expect the L&G share price to come back to life and quickly close that valuation gap, given the current volatility. What it does do, however, is provide me with protection against further decline in sentiment. I don’t feel like I overpaid for the stock.
Dividends are coming
If the stock price takes a while to recover, that’s fine with me. It means my reinvested dividends will generate more shares at the lower price. I received my first interim payment on September 26. Since I expect to hold the stock for decades, I expect to receive many, many more.
Legal & General is now forecast to return 9.14% in 2023 and 9.6% in 2024. Normally, such skyrocketing returns would make me run for cover, but they really look sustainable. The latest provisional distribution of 5.71p was 5% higher than last year’s 5.44p.
Dividends are never guaranteed, but L&G is generating huge amounts of capital. It would be nice if the share price also grew at some point. It will come, in time.
A stock market crash and global recession could cast a shadow over the company, but because I’m holding the position for the long term, I have time to recover. If L&G stock gets even cheaper, I’ll jump in and buy more. In fact, I would still buy it. After all, it is my favorite FTSE 100 stock.
