Legal & General confirms fat dividend

It's been four weeks since the financial sector became fashionable again, and Legal & General has certainly had a month to remember. However, given its share price had risen 22% to an eight-week high, full-year results had to be good. And they were, although some debate about the balance sheet has triggered a round of selling Tuesday. 

Operating profit grew by 14% to £1.45 billion in 2015, a tad below consensus estimates, and adjusted earnings per share (EPS) jumped by 11% to 18.58p. The big driver here was a better-than-expected 14% improvement in net cash generation to £1.26 billion after new business rose 13-fold to £39 million.

This bankrolls a 19% increase in both the final and full-year dividend to 9.95p and 13.4p respectively.

But under new European rules, insurers are now reporting solvency capital ratios. Up to now they've all been pretty good. Prudential reported a Solvency II surplus of £9.7 billion and capital ratio of 193%, Aviva was £9.7 billion and 180%, and Old Mutual £1.6 billion and 135%.

L&G reported Solvency II surplus capital of £5.5 billion, giving a coverage ratio of 169%, which Panmure Gordon analyst Barrie Cornes called "very healthy".

Solvency II is a new set of rules governing the amount of capital European insurers must hold to reduce the risk of insolvency. It must be enough to give 99.8% probability that it can meet its obligations over the next year. It was introduced at the beginning of January, so this is the first proper look at the impact on UK firms.

There have been mumblings of discontent elsewhere in the Square Mile, though, and the share price is down as much as 6%. But, despite disagreements in the City, management is clearly comfortable with the balance sheet position.

"We have a robust business model which has proved to be adept and resilient in dealing with fiscal and regulatory changes in our sector," said chief executive Nigel Wilson. "We are planning for more global economic and market volatility and are well positioned for continued pressure on pricing and changes in product mix in our industry."

"The shares have rallied since mid-February when L&G decided to update the market concerning the strength of its investment portfolio," says Cornes. "We believe that the clarification of its strong Solvency II position should help further reinforce its capital strength and should see the share price rally to a more realistic valuation."

Currently, L&G trades on 10.8 times earnings estimates for 2016 and, shifting to a new progressive dividend policy from one linked to net cash cover, offers a prospective dividend yield of 6.4%. It's why Cornes thinks the shares are worth 305p.

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