- Shares jump on reassuring first half update
- Management confirm cash generation
- Strong performance from pension transfer business
Shares in financial services and asset management group Legal and General (LGEN) jumped 4% to 243p following the release of a reassuring first half trading update.
Over the last month the share price has fallen 6.5% and on a six month basis they are 22% lower.
ROE TARGET CONFIRMED
Management confirmed that its operating performance was in line with expectations and it expected to deliver double-digit growth in cash and capital generation for the first half of 2022.
Moreover, the group is on track to generate a 20% return on equity and its Solvency 2 ratio of 215% provides a strong capital buffer.
The first half benefited from a particularly strong performance from the global PRT (pension risk transfer) business.
This involves a defined benefit pension provider seeking to remove some or all of its obligations to pay out a guaranteed retirement income to plan participants.
Transactions in PRT reached £4.5 billion during the first half, and were written at margins that are in line or better than the firm's long-term average.
The pipeline for pension risk tranfers remains strong at around £20 billion, and the firm has a five-year ambition to reach £40 billion to £50 billion of assets in the UK and $10 billion internationally.
CASH AND DIVIDEND FOCUS
Legal and General has arguably held the title as the premium cash and dividend distributor in the UK life market for a number of years.
The group expects to achieve £1.8 billion of capital generation in 2022, and aims to generate between £8 billion and £9 billion of cumulative cash between 2020 and 2024.
Cash and capital generation are expected to significantly exceed dividend growth, which is targeted to be in the region of 3% to 6% per year over this period.
EXPERT VIEW
Jefferies analyst James Pearse believes the trading statement is ‘particularly reassuring in our view. Contrary to popular belief there have been over £2 billion more upgrades year to date than downgrades and no credit defaults’.
According to estimates from broker Berenberg, L&G is forecast to grow earnings by 4.5% from 2022-2023, and by 5.5% from 2023-2024.
On their estimates, the stock is trading on a current 2022 price to earnings ratio of 6.6 times, falling to 6.3 times in 2023. The current 2022 dividend yield is 8%, rising to 8.4% in 2023.
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