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One of the attractions of investing in insurance stocks is that they often have attractive dividend yields. Admiralfor example, offers 5.9% and rival legal and general (LSE: LGEN) yields 7.1%. But the recent cancellation of dividends by Direct line it’s a reminder that returns calculated based on past payments don’t necessarily help investors know what to expect in the future. So what about Legal & General’s dividend forecast?
dividend strategy
Legal & General is quite unusual in that it sets its dividend plans years in advance, at least at a high level.
In 2020 he proposed a five-year plan. Part of that was increasing the dividend in the low to mid-single digits in percentage terms starting in 2021. It has delivered on this so far: 2021 saw a 5% year-over-year increase in the total dividend, while last year the dividend a account also increased by 5%.
Absent unexpectedly weak business performance, I expect this pattern of rising dividends to continue. In November, the company told the market it expected to deliver full-year operating profit growth and capital generation in line with its guidance. That suggests that the final dividend will increase according to the strategy. If business performance this year and next continues to be strong, I expect more annual dividend increases of a similar size.
Possible risks
However, any dividend forecast from Legal & General is just that: a forecast.
If the company sees earnings or capital generation weaken unexpectedly, the dividend is always at risk. That’s what happened in 2008, when the pay was cut during the financial crisis.
Today’s market is tough for insurers, as Direct Line’s shock dividend cancellation shows. As recently as November, Direct Line had affirmed its “dividend capacity outlook”. He attributed the cancellation just two months later to events like harsh winter weather. Insurers had already been battling claims inflation before the cold snap and that remains a risk to earnings.
There is a risk that such challenging conditions could also hurt Legal & General’s profitability. But I am optimistic in that sense. A very cold winter should be part of bread and butter scenario planning for any general insurer. For Direct Line to remove its dividend due to such an event simply makes me think that it has suffered from weak management.
I see no reason to think that Legal & General will have the same problems that have plagued Direct Line, despite operating in overlapping markets.
would buy for income
If I had extra money to invest and income was my top priority, Legal & General’s dividend forecast would catch my eye. I believe this well-run FTSE 100 company has a strong brand and an attractive dividend. So I think it could be a great income pick for my portfolio. I’d be happy to buy the shares.
The draw for me here would really be about the income.
Over the long term, the company’s stock price performance has been disappointing. Shares have lost 11% in the past year and are 5% lower than they were five years ago. So while I’d be happy to buy Legal & General for its earning potential, if stock price growth were my goal, I’d invest my money elsewhere.
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