By 9am today (5 August), the Legal & General (LSE:LGEN) share price was up 0.5% after investors digested its performance for the six months ended 30 June.
How is the financial services group doing? Let’s see.
Going in the right direction
During the period, the group reported a 7% increase in core operating profit compared to the same period a year earlier. It attributed its improved performance to having a “simpler” business and being “more focused”.
But due to a reduction in the number of shares in issue, brought about by the group’s share buyback programme, the improvement in core operating earnings per share (EPS) was 11%.
The company singled out its Asset Management division as doing particularly well. Earnings from fee-related activities increased 73% and new business was at a record level. The £5.7bn (at 31 July) of new schemes secured by its pension risk transfer arm also helped increase its bottom line. Legal & General now manages £236bn of UK defined contribution assets and £128bn of workplace pensions.
As a result of the strong start to the year, the group said it remains “on track to meet or exceed our strategic targets”. For 2026, it expects an increase in its core EPS to be at the “top end” of its 6%-9% target range.
Despite this apparently good result, investors appear lukewarm. Why?
A bit flat
It could be that they were disappointed by a fall in two key performance metrics.
The first is the Solvency II ratio, a measure of balance sheet strength. It was 201% at 30 June, compared to 217% a year earlier. Much of this is due to the outflow of cash used to repurchase its own shares. But it remains above the group’s own self-imposed target of 160%-190%. More importantly, it’s over twice as high as the 100% required by regulators.
Secondly, the City might have raise an eyebrow at the drop in the store of operating profit. This is an estimate of the future earnings generated from its pensions business expressed in today’s money. This probably reflects the competitive market in which it operates. Okay, it’s only fallen by £75m during the past 12 months. Even so, this is something to keep an eye on.
My view
On balance, I think the business is in good shape.
However, although its bottom line is increasing, I suspect most shareholders have a stake in the group because of its dividend. I reckon they would view capital growth as an added bonus.
As expected, it’s increased its interim payout by 2%. Based on amounts declared over the past 12 months, it retains its position as the FTSE 100’s highest-yielding share. But dividends are never guaranteed. To sustain its above-average return, it needs to continue to grow its earnings. Here, I’ve seen enough in this morning’s results announcement to make me think this can continue for the foreseeable future. As a result, I suspect the share price will continue to move higher at a steady – if unspectacular – rate.
I’m already a shareholder in Legal & General. It’s therefore encouraging to see a strong set of results. Overall, I think the stock’s worth a close look.
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James Beard owns shares in Legal & General plc.
