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Legal & General (LSE: LGEN) shares offer the most generous trailing dividend yield on the entire FTSE 100. At 8.7%, it’s double what savers can get from a market-leading deposit account.
The difference could widen even further if the Bank of England cuts interest rates again on Thursday (18 December). Yet investors must remember that dividends aren’t guaranteed. So can Legal & General continue to shower investors with income next year too?
As with any investment, it’s important to look beyond the headline figure. While the income is eye-popping, that’s not much use if it isn’t sustainable.
FTSE 100 dividend star
The best dividend-paying companies aim to increase shareholder payouts year after year, to encourage and reward long-term loyalty. To do that, they must generate sufficient cash flows to fund them.
So how has Legal & General done? The board has increased shareholder payouts every year this millennium with just three exceptions. It made two annual cuts during the financial crisis, and froze the dividend per share during the pandemic. Investors still got a generous 17.57p per share though.
Over the last 15 years, dividends have compounded at the annual rate of 11.75%, which is one of the highest rates of growth I’ve seen lately. I’m certainly impressed with its commitment to rewarding shareholders.
But I’ll curb my excitement to add a warning. In the last four years, the pace of dividend growth has slowed to 5% a year. That now looks set to slow further going forwards, to 2%. So what’s going on?
Firstly, I suspect the board thinks that super-sized yield is already high enough. If it climbed towards double digits, investors may start to be a bit suspicious.
Profits, cash, buybacks
Now here’s a more measurable reason. Pre-tax profit has swung about over the last five years, from a high of £2.6bn in 2021 to a low of £195m in 2023, before recovering to £542m in 2024.
Earnings per share growth has slipped in each of the last three years – by a hefty 62%, 43% and 61% respectively. Many are nnow wary of the yawing gap between its bumpy earnings and ultra-generous dividends.
Legal & General is at the mercy of recent big swings in investment markets. Yet rival Aviva has managed them far better, while working hard to streamline the business, and its shares have outperformed as a result. Legal & General should learn.
The Legal & General share price is edged up just 6% in the last year, and flat over five years. So while there’s lots of income, growth has been in short supply.
I still think it’s still worth considering. Over the next three years, the board plans to return a total of £5bn through dividends and share buybacks. Which shows confidence.
Its Solvency II coverage ratio was strong at 217% in the first half of the current financial year, even if that’s down slightly from 223% a year earlier.
The yield is forecast to hit 8.86% in full-year 2025, then rise to 9.4% in 2026. Say yes, I’d say there’s a fair chance Legal & General will shower investors with still more income next year. I’d treat any share price growth as a bonus.
