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Legal and general (LSE:LGEN) is among the highest-yielding dividend stocks on the market. FTSE 100. In fact, the insurer has a dividend yield of 8.7%. Only two companies in the index surpass it.
So why am I confident this is the safest 8% dividend stock in the index? Let’s take a closer look.
Coverage
Dividend coverage is a financial metric used to evaluate a company’s ability to pay dividends to its shareholders while maintaining financial stability and meeting its other financial obligations.
It is usually expressed as a proportion. And this is often called the dividend coverage ratio. We can do this calculation ourselves by dividing a company’s earnings by the total dividends it plans to distribute to shareholders.
In 2022, Legal & General’s dividend coverage ratio was double, indicating that the company generated twice as much profit or cash flow as needed to cover its dividend payments to shareholders.
This strong dividend coverage ratio reflects the company’s financial strength and its ability to comfortably sustain its dividend policy. It also suggests that Legal & General had a healthy cushion to absorb unexpected financial challenges or economic fluctuations while continuing to provide consistent dividends to its investors.
Performance
Despite a challenging macroeconomic environment and contrary to declining share prices, Legal & General’s performance has demonstrated impressive stability.
Operating profit in the first half reached £941 million, only slightly below £958 million a year earlier. Additionally, the insurance giant highlighted its progress towards achieving its five-year targets of generating between £8bn and £9bn in capital by 2024. To date, Legal & General has already generated £5.9bn.
In its results presentation, the board also noted a net surplus generation on dividends of £600m. This is in addition to deferred profits from new business totaling £600m. Additionally, during the period, Legal & General’s Solvency II coverage ratio increased from 212% to 230% year-on-year. This is a fundamental indicator of the financial solidity of the insurance sector.
Tail winds
Looking ahead, I expect more favorable tailwinds than challenges on the horizon.
First, as interest rates begin to fall, we can expect a movement of capital back into stocks. This happens when the attractiveness of cash and debt falls as interest rates moderate.
This change may act as a catalyst to improve performance within the L&G Investment Management (LGIM) division, which has lagged.
During the first half, high interest rates had a negative impact on asset prices. This translated into a 10% year-on-year decrease in assets managed by the insurer.
Second, I believe Legal & General is well positioned to capitalize on positive trends in wholesale annuity purchases. Given that only 15% of UK defined benefit pension liabilities have so far been transferred to insurers, there may be ample growth opportunities in this sector.
However, despite these tailwinds, it is worth noting that the company now has new leadership following the retirement of Sir Nigel Wilson. This introduces an element of uncertainty. But for me, I still view Legal & General as an excellent dividend stock with potential for share price growth as well.
