Legal & General Group Plc Mid Year Rating (OTCMKTS:LGGNY)

investment thesis

Last October, we wondered why the share price of Legal & General Group Plc (OTCPK:LGGNY) (OTCPK:LGGNF) was not higher.

It’s always nice to they receive their safe and reliable dividends twice a year.

A dividend that now yields 9% on a TTM basis. However, if the stock price does not increase, investors must take this into account when deciding whether the company is worth their investment.

In the middle of each year, LGGNY management has its capital market day in London, where investors and analysts receive an update on the company’s progress.

Since we shared our view on LGGNY nearly a year ago, we’d like to take this opportunity to update you on our previous Buy thesis on the company.

Background of Legal & General Plc

The company is a London-based multinational financial services company with 188 years of history.

It started as a life insurance company. It was sold to Allianz (OTCPK:ALIZF) in 2020. Their main business is investment management, institutional and retail pension schemes.

From 30^th as of June 2024, their AUM was £1.136 trillion, which equals $1.49 trillion.

Their primary listing is on the London Stock Exchange, where it is a component of the FTSE100 index.

Capital Market Day highlights

This was the first time we saw and heard the new LGGNY Group CEO Antonio Simoes. The presentation answered many questions about how management plans to make improvements for stakeholders. Three main topics were presented.

In terms of ROE, they still expect to achieve an ROE above 20% over the next three years.

Management has set a target for the next three years to grow core operating EPS at a CAGR of six to nine percent. We will show that, based on past growth, we believe their target should be realistic and manageable.

Why do we think their targets are realistic and manageable?

According to LGGNY’s 2023 Annual Report, global AUM is expected to grow from over $115 trillion in 2022 to $147 trillion by 2027.

As they are already positioned as one of the world’s leading asset managers with $1.49 trillion AUM, we believe they will capture some of this expected growth in AUM globally. They have customers in Europe, America and opened an office in Singapore in 2022 to access the Asian market.

One area where LGGNY is growing is its offering of ETFs to investors.

ETFs continue to grow in popularity. As much as we here at SA like to pick our stocks in search of alpha, many new investors prefer to choose ETFs as a way to gain market exposure.

LGGNY currently has a stable of 1 commodity ETF, 8 fixed income ETFs and 15 equity ETFs. This list of offers should grow and the size of the funds should increase.

Instead of having two separate asset management divisions, LGIM and LGC, they have now merged the two into one.

Legal & General Investment Management, or LGIM, was one of the world’s largest asset managers, with AUM of £1.2 trillion. Legal and General Capital Investments, or LGC, invests in commercial real estate, clean energy, housing and alternative finance private assets.

From now on, the merged entity will simply be called Asset Management.

It should cut some costs. We regularly read reports from management like LGGNY, but also HSBC ( HSBC ) with their plans to improve their cost-to-income ratio. However, every quarter we see that in reality this seems to be quite difficult to achieve. Next, let’s see if they can fulfill these plans.

In previous articles, we shared our view of LGGNY’s business of being homebuilders. This is achieved through their interest in CALA, which is the UK’s 10th largest housebuilder. It is a business that is quite different from the rest of their business.

Here’s what their new CEO had to say:

We’ve been very transparent about CALA not being strategic, but that doesn’t mean we’re in a rush to sell or maximizing value is the important objective here.”

For the 2023 fiscal year, CALA’s adjusted operating profit was £112 million, which is not an inconsiderable amount of money; However, it represented only 6.7% of their total adjusted operating profit that year.

As such, they are right to redirect most of their resources elsewhere. A sale of CALA would be a good way to recycle capital.

• Improved return for shareholders

Management previously planned to increase its dividend by 5% per year through 2028.

This has now been revised to a cash distribution that will increase by 2%, but with the addition of share buybacks. For now, they have committed the first tranche of £200 million by the end of this year. There is no guarantee that this redemption plan will continue, but that is their stated intention.

Is their dividend well covered?

We can see that the dividend over the past ten years has been well covered by much higher adjusted earnings per share.

LGGNY’s 2024 financial report

On 7th August we received our FH 2024 financial results. Underlying operating profit of £849m was in line with last year’s results. They topped last year’s result by £5m.

ROE increased from 28.6% last year to 35.4% this year.

Their Solvency II coverage remains high at 223%.

What is important is their growth in reserve for future profit from the new business generated. This was up 7% on last year to £14.5bn.

The share price is going nowhere

As share prices at many of our financial agencies have performed well over the past couple of years, we wondered why LGGNY had not.

For information, one share of ADR LGGNY represents 5 ordinary shares of Legal & General Group Plc.

In this article, we wanted to compare LGGNY with that of Prudential Financial (PRU).

Over a year, there is a 19% difference in share price earnings.

We are aware of the danger of cherry-picking data points, as one might inadvertently cherry-pick data that happens to validate a particular view or thesis. To try to avoid this, we also looked at other time frames such as 3, 5 and 10 years.

We also wanted to measure LGGNY against the FTSE 100 Index (UKX).

Perhaps the reason the share price has gone nowhere is that investors fear the complexity of valuing the company’s true liabilities. In a previous article, I wrote:

Before we became shareholders of Legal & General, we did what we always do, which is to do a risk assessment of its assets and liabilities, among several other criteria that we have. We are not actuaries and we must admit that we have come to the conclusion that it has been difficult to assess what the liabilities are.”

Risk for thesis and conclusion

As with so many financial institutions, it is difficult to determine what their obligations are. They are stress tested and all have rigorous risk management. We can only hope that their high solvency ratio will be a big enough buffer to weather any storms that may come.

However, we still think this is the main risk with LGGNY.

In terms of profitability, a more focused approach should translate into higher operating profits going forward.

Demand for asset management at the scale that LGGNY can provide is also growing. We are positive about their new policy of returning capital to shareholders. A combination of a slightly higher annual dividend and some share buyback should be welcomed by shareholders.

It is more difficult to predict what will happen to a company’s share price than what may happen to its dividends. All we can do is hope, although that in itself is not a strategy.

In the meantime, we are well paid to wait and see.

Our buy position remains for LGGNY.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.