LGGNF - We Like Legal & General Group's Growth Story

2023-03-09 04:21:14 ET

Summary

• Another solid year from one of the U.K.'s leading life insurers and pension plan providers.
• Management set out an ambitious 5-year plan for growth and is on track to deliver this.
• A solid capital base and a high ROE is what we like about this company.
• A growing dividend should push the share price higher.

Investment thesis

Financials are the second largest part of our portfolio and as a result, we have benefitted from higher interest rates.

One of the companies in the portfolio is Legal & General Group ( LGGNY )( LGGNF ) where we have been invested since 2020.

We are pleased with the dividends that we regularly get, but in terms of any asset value appreciation, it has not been quite as expected.

The share price has basically been flat over the last year despite the FTSE100 being up 15%.

Is this a value trap or will the share price grow in tandem with the market and with the expected higher earnings and dividends from LGNNY?

LGGNY has just published its FY 2022 financial results so it is time to see how they are doing.

2022 FY Financial Results

The total operating profits from their four divisions was GBP 2.93 billion in 2022. This came from the following divisions:

• LGRI - Retirement Solution

LGRI's business activity is in the global pension risk transfer market, focusing on corporate-defined benefits, abbreviated as "DB" pension plans. They operate in the UK, the US, Canada, Ireland, and the Netherlands and have more than GBP 6 trillion of pension liabilities.

According to the management of LGGNY, the demand for pension risk transfer is growing as rising interest rates and widening credit spreads reduce pension deficits and allow more pension funds to consider de-risking.

This is by far the largest contributor to the operating profits with GBP 1,26 billion, or 43% of the total.

• LGC - Asset Origination

In this division, there are 4 main asset classes, namely specialist commercial Real Estate, clean energy, housing, and SME finance. We have in the past written about their home builder called Cala. It is a leading provider of U.K. homes.

The operating profits for 2022 were GBP 509 million, or 17.4%. Their ambition is to grow this to approximately GBP 600 - 700 million by 2025. Their AUM for third parties is growing too. As of the end of 2022, this stood at GBP 16.6 billion and the goal is to bring this up to about GBP 25 - 30 billion by 2025.

• LGIM - Asset Management

The value of the assets under management decreased by GBP 225bn to GBP 1,196 billion, mostly as a result of the lower asset valuation over the year. On a positive note, we noticed that the external net inflows of external funds increased by 43% from 2021 to GBP 49.6 billion.

In terms of size, LGIM is the smallest division when looking at its operating profits, which came in at GBP 340 million last year, or 11.6% of the total.

• Retail - Retirement & Protection Solution

Although the U.K. is their main market, they are growing the business in other markets such as the U.S. Their life insurance business in that market managed to return to a profit, driven by robust new business volumes and the benefit from reinsuring the in-force universal life book.

The operating profits from the retail division grew the most last year, recording a growth of 33% from GBP 620 million to GBP 825 million. It contributed 28% of the total operating profits.

In totality, we like the fact that they are growing all the important factors, such as EPS, dividend per share, and the net book value per share.

With the 5% increase in the dividend to GB pence 19.37 we get a yield of 7.4%, and this is set to grow to a yield north of 8% at the present share price.

Business development

In our previous article , we pointed out that being one of the world's largest asset managers comes with huge responsibilities. We wrote another one and can be read here.

LGGNY and other large institutional investors are aligning their investments more and more with sustainability and inclusiveness in their criteria for investing. We argued that you can do good in the world and still make money.

Their 20.7% ROE is a testament to that.

Risks to the thesis

It is in our opinion impossible for us to determine with any accuracy what are their potential liabilities. Mortality rates and future obligation is something their risk managers deals with every day.

We have confidence that they know what they are doing.

On top of that, it is good to know that they do have a strong balance sheet with a solvency rate of 236%, which is up from the 187% it was at the end of 2021. Their annuity portfolio did perform well in 2022 as they had no defaults.

Conclusion

Generally, it is not easy to know if a stock is a value trap or not. We look for a catalyst that can propel the share price further.

Back in August last year we concluded that LGGNY was still a buy as we believed it was reasonable to expect that the company can deliver on 5-year growth targets from 2020-2024 which they set in November of 2020. They were to reach:

Cash and capital generation of GBP 8 - 9 billion which exceeds the dividends of GBP 5.6 - 5.9 billion.

It also entails an EPS that will grow faster than dividends, with the dividend growing at 5% to FY 2024. Their net capital surplus generation shall also exceed their dividends.

LGGNY did make progress against these ambitions in 2022 and we, as they are confident they can achieve these goals.

So far, they have already achieved a 14% growth in cash generation and a 10% growth in a capital generation. From 2020 to FY 2022, they have already achieved GBP 5.1 billion in cash generation and GBP 4.9 billion of cumulative capital generation and declared GBP 3.3 billion in dividends. They have also generated GBP 700 million of cumulative net surplus over the dividend.

With management being on track to reach these goals, investors should be excited which again should result in a higher share price from here.

At least, we cannot say that it looks like a value trap.

We maintain our Buy stance and will continue to add to our positions whenever Mr. Market gives us an opportunity to buy more shares at attractive prices.

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