Legal & General Group (LSE: LGEN) shares have caught the attention of income investors, offering a 7.6% dividend yield that could turn a £10,000 stake into £760 of annual passive income.
The FTSE 100 asset manager’s shares surged 30% over the past year before pulling back sharply from 320p to 292p in a matter of weeks, prompting serious questions about whether the stock has already peaked.
At the heart of Legal & General’s income appeal is its pension risk transfer business, which has written around £95bn of pension deals over the past decade with first-half volumes remaining strong.
However, management has acknowledged that profit margins on those pension deals have fallen, due to a narrowing gap between corporate bond returns and the risk-free government rate.
Competition in the pension risk transfer market is also intensifying, adding further pressure to a division that remains the company’s primary engine of capital generation.
To offset some of these headwinds, Legal & General launched a £1.2bn share buyback, the largest in its history, while total expected shareholder returns for the year stand at £2.4bn.
On the dividend sustainability front, the numbers remain encouraging, with Solvency II operational surplus generation per share rising 7% in the first half and core operating earnings per share climbing 11%.
The solvency ratio stood at 201% at the end of June, sitting comfortably above management’s own target range of 160% to 190%, suggesting the capital base underpinning shareholder returns is in reasonable health.
Analysts at JP Morgan have argued that rival Aviva is generating superior free cash flow on certain key measures, though direct comparisons are complicated by Aviva’s broader diversification across general insurance and other operations.
Legal & General is also working to diversify, with its workplace pensions business growing strongly, though that division remains small relative to the pension risk transfer operation that faces the sharpest margin squeeze.
The company’s longer-term investment case rests on structural tailwinds, including ageing populations and pension trustees increasingly seeking to offload risk, both of which should continue to support demand across its core businesses.
Andrew Mackie, who holds shares in Legal & General, believes the balance sheet is strong and capital generation remains healthy, but suggests better opportunities may currently exist elsewhere within the FTSE 100 given the shares’ recent strong run.
For income-focused investors, the recent share price decline serves as a pointed reminder that a headline yield of 7.6% does not come without meaningful risk attached to it.