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The outlook for the UK economy this year remains bleak. This is hindering a group of FTSE 100 stocks believed to be overexposed to Britain’s struggling economy. However, I think the long-term prospects of a dividend stock are being overlooked. This is why.
Underrated Stocks
The latest forecast from the EY ITEM Club, a UK economic forecasting group, says a UK recession is likely to be deeper, but not longer, than previously expected. So the economy is on track to grow again from mid-2023.
As a long-term investor, that doesn’t alarm me too much. However, it appears that the financial services giant legal and general (LSE: LGEN) has been marred by all this headline negativity. Despite the FTSE 100 rising 6% over the past year, L&G shares are down 7%.
as a national bank lloyds, L&G has been lumped in with the broader UK economy. That’s understandable given its extensive exposure to the British economy with pensions and insurance. But that is only part of the story.
LGIM, its investment management arm, is one of the largest in the world and the second largest in Europe. It has assets under management of $1.6 trillion, as of June 2022. It is a major global investor, with interests in the US, China and Japan.
Furthermore, half of L&G’s pension assets are international. In terms of insurance, it offers more coverage in the rapidly growing Indian market. In addition, it is expanding significantly into the US for the first time, where it has built a major life sciences and technology platform called Ancora L&G.
I expect this geographic expansion to offer growth opportunities in the coming years. And as populations age in its key markets, its range of pension and annuity products is likely to be in high demand.
massive performance
The company’s most recent first half results, announced in August, were strong. It increased its operating profit, profit, solvency ratio and increased its dividend.
However, the stock still looks cheap, with a price-earnings (P/E) ratio of 7.5. And the dividend yield for 2023 is now a whopping 8%.
Of course, this great performance may indicate that the company could reduce your pay. However, the fact that the dividend is covered 1.8 times by earnings gives me confidence that it is safe for now.
The company has a decades-long track record of growing its dividend. It is basically a dividend machine, ideal for generating passive income.
risks
The size of L&G’s various operations and growing global presence open up several risks. We saw in 2021 how the Chinese real estate market experienced severe financial stress. While not affected by this particular black swan, it does show how the company might find something similar in an international market to which it is exposed.
However, L&G’s vast experience and pedigree in assessing such risk and complexity give me peace of mind. There were no defaults on their annuity portfolios during the first half of last year. And he received 100% of the scheduled cash flows from his direct investments. This is an extremely well run business.
The stock is at 260p today, which is the same price it was at in 2018. I plan to add to my share very soon.
