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Since 4 August, the Legal & General (LSE:LGEN) share price has fallen over 10%. This puts it in the bottom 20% of FTSE 100 performers. From what I can see, there are three explanations for this.
1. Broker downgrade
Following publication of its results for the six months ended 30 June (H1 25), the pension and investment group’s stock was downgraded by JP Morgan from Overweight to Neutral. The bank also cut its 12-month price target from 290p to 275p. Even so, its new target is still 18% higher than today’s (3 September) share price.
JP Morgan warned that there’s “limited scope for positive surprises relative to current consensus”. It was also concerned that the group’s dividend and share buybacks (its latest £500m programme ended today) aren’t covered by free cash flow.
This is likely to have spooked income investors who hold the stock for its reliable dividend – it was last cut in 2009. If the group sticks to its pledge to increase its payout by 2% this year, it means the stock’s currently yielding 9.4% — the second highest on the FTSE 100.
Of course, JP Morgan’s offering just one opinion. Others may agree or disagree. But broker downgrades can influence investor sentiment and send a share price lower.
2. Ex-dividend
On 21 August, the stock went ex-dividend. Anyone owning shares before this date is entitled to receive the interim payment of 6.21p on 26 September. All things being equal, when a stock goes ex-dividend its share price will fall by an amount equal to the payout. That’s because new owners of the stock aren’t entitled to receive the dividend.
3. Rising gilt rates
This week, the interest rate on 30-year government bonds hit a 27-year high. And other countries are experiencing a similar trend. Rising gilt rates — interpreted as a sign that the bond market’s becoming increasingly concerned about the state of a nation’s finances – usually cause wider investor nervousness.
This is a problem for Legal & General because, at 30 June, it had £511bn of financial investments and property on its balance sheet. Maintaining the value of these assets is necessary for the group to meet its obligations.
However, this could be a double-edged sword for the group. Rising bond rates are generally good for defined benefit pension funds as they help reduce pension liabilities. Under these circumstances, trustees are in a good position to offload their schemes to third-party providers. Legal & General’s expecting big things from its pension risk transfer business – it reckons £500bn of assets in the UK will be up for grabs over the next decade.
Keeping faith
Despite the recent share price wobble, Legal & General looks to be in good shape to me. Its core earnings per share for H1 25 was 9% up on the same period last year. And its Solvency II ratio is 217%, meaning it’s holding more than twice the level of reserves it’s obliged to.
And I think the group’s dividend and buyback programme are secure for now. It’s agreed to sell its US protection business for $2.3bn. Some of this cash will be used to buy more of the company’s stock.
For these reasons, I plan to hold on to my shares and think other investors could consider adding some to their own portfolios.
