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Legal and general (LSE:LGEN) shares offer brilliant dividend income. I already have the FTSE 100 insurer and asset manager, but I'm tempted to buy more as part of this year's stocks and Shares ISA limit. So what if I go all out?
I have generally been reluctant to make large investments in a single stock. I bought L&G shares on three occasions last year, but invested only £4,000 in total. Maybe it's time to show more courage in my convictions.
L&G has a blockbuster trailing return of 8.8% per annum. However, I don't want to get that kind of return for just a year or two. I want to receive it for decades.
I want growing dividends
Ultra-high yields are notoriously vulnerable, and dividend coverage recently fell to just 0.4. I like payments to my shareholders to be covered twice by earnings.
Markets still expect the yield to rise to 9.1% in 2024, with improved coverage of 1.1. That's better, but it doesn't reassure me at all. However, Legal & General has a strong track record of increasing dividends over the past decade. Let's see what the graphs say.
Chart by TradingView
On June 12, the board set out its dividend strategy from 2024 to 2027. It committed to increasing the dividend by 5% in 2024 and then by 2% thereafter.
However, markets were not impressed. Legal & General's share price has plummeted 8.44% over the past month. Not even a £200m share buyback (and the promise of more in the future) cheered them up.
The company has been frustrating investors for some time. Shares are down 13.25% in five years. In the last 12 months, they have increased only 2.48%.
The board is now targeting 6% to 9% compound annual growth in core operating earnings per share over the next three years, with an operating return on equity of more than 20%. If this fails, investors won't like it.
The stock price should automatically rise when interest rates finally start to fall. That will make its excellent performance look even more attractive relative to cash and bonds. A stock market recovery would boost financial stocks across the board.
FTSE 100 frustration
Despite its problems, the stock is not cheap. When I bought them, they were trading at around six times earnings. Its price-earnings valuation has suddenly skyrocketed to 33.35 times.
Chart by TradingView
This is due to a sharp drop in earnings per share from 12.84p in 2022 to just 7.35p in 2023. The board's turnaround plan better fix that.
There is a long-term opportunity for the savings and retirement market, as we cannot rely on the State to provide us with a comfortable retirement. However, Legal & General has struggled to deliver.
If I invested up to my full £20,000 ISA limit at the current share price of 232.1p, I would purchase 8,617 shares. If the dividend of 20.34 pence per share increases by 5% in 2024, I can expect 21.36 pence. That would give me an impressive passive income of £1,840 a year. Given the risks, I lack the courage to do everything possible. I will continue to invest another £4,000.
