Investors are focusing too much on potential risks and not enough on growth opportunities at Legal & General Group PLC (LON:LGEN), according to Citigroup.
The bears are fixated on Solvency II, the impending EU directive on insurance regulation, and on credit risk, but Citi thinks these are outweighed by market growth opportunities.
READ: Legal & General's first-half profits supported by retirement business but shares fall
The US bank is forecasting 7% annual operating profit growth through to 2020 and this, allied with a 5.8% dividend yield, persuaded Citi to upgrade the stock to ‘buy’ and increase the target price to 296p.
“We acknowledge overweight credit risk exposure but gain comfort through a high quality investment portfolio backed up by a sizeable credit default reserve,” Citi said.
Elsewhere in the sector, Citi also had some love for the Pru, which it rates as a ‘buy’.
Citi has cranked up the target price for Prudential PLC (LON:PRU) to 2,109p and predicts that the cash pay-out is set to accelerate.
Rated on 12 times projected earnings per share for 2018, Citi says the shares offer attractive value, and “with almost double digit annual operating profit growth through 2020, a 2.5% dividend yield and the potential for cash pay-outs to accelerate going forward. Prudential’s favourable exposure to Asia cannot be ignored”.
Citi argues that the growth story is far broader than the above scenario.
“We believe that Prudential’s leading US variable annuity franchise is underappreciated in a time of regulatory uncertainty and the UK business is in the midst of repositioning to a high-growth, fee-based, capital-light model. A focus on new business with fast payback periods will result in holding company cash that is significantly higher than the >£1 billion company target,” Citi opined.
Shares in the Pru were up 0.8% at 1,864p.