Legal & General Group PLC (LSE:LGEN) divides opinion among investors, and its recent decision to sell its US protection business and 20% of its US pension risk transfer (PRT) business has sparked fresh debate.
UBS remains bullish on the stock, reiterating its 'buy' rating, but acknowledges investor concerns around high dividend payouts and increased credit risk.
Dividend payouts: A concern, but not a problem
One of the main worries among investors is L&G’s high payout ratio—essentially, how much of its profits go back to shareholders in dividends. Some fear this could leave the company short on cash, but UBS believes these concerns are overblown.
L&G is an income stock, meaning its ability to generate cash flow is more important than short-term capital fluctuations. UBS notes that the business being sold—its US protection division—has historically contributed around £100 million in free cash flow per year, but with a low payout ratio of under 50%.
By comparison, L&G’s UK life insurance business (LGAS), which drives most of the company’s cash flow, has a payout ratio exceeding 100% in the past. UBS argues that because LGAS remains untouched by the sale, L&G’s ability to pay dividends is not at risk.
UK insurance remains key driver
L&G’s UK insurance business is its main cash generator, contributing around 60% of the group’s total cash remittances. While its payout ratio has been above 100% in the past, UBS points out that this is not unusual—Aviva has also returned more cash to shareholders than its capital generation in recent years.
The key point, according to UBS, is that L&G’s strong solvency position, particularly within LGAS (over 200%), provides confidence that the company can maintain its shareholder returns.
Higher asset leverage raises questions
The second concern among investors is increased asset leverage, or in simpler terms, how much L&G relies on borrowed money to fund investments. Higher leverage can mean greater credit risk, which could become an issue if markets turn sour.
UBS notes that L&G already has relatively high asset leverage compared to its peers, and the US sale will push this even higher on some financial metrics.
However, the firm argues that L&G’s group solvency ratio (estimated at 235% for full year 2024) should provide enough cushion to handle market shocks while still maintaining shareholder returns.
With L&G committed to returning 40% of its market capitalisation to investors over the next three years, UBS sees the stock as an attractive long-term income play, despite the ongoing debate.