Lots of large companies are currently reducing or even completely scrapping their dividend payments, and whilst some of them will still be seen as attractive investments for capital growth, it leaves income funds in a bit of a quandary. These large income funds will have an investing policy whereby they have to invest in stocks which generate an income via dividends or other types of investments which pay interest or a coupon but even those aren’t as plentiful as they once were due to interest rates being close to zero, and debt is higher risk than normal in the current economic situation. The only other alternative is that they change their investing policy to allow them to continue to hold investments in companies that have temporarily suspended dividends, but for that they need the permission of those invested in the fund. I believe that this makes those large companies which are intending to maintain their full dividend more attractive – assuming of course that they have the financial means to pay it without risking leaving themselves short of cash should the Covid-19 situation last for an extended period of time. For me FTSE-100 insurance giant Legal & General (LGEN) very much falls into this category...
It announced on Friday that it intended to maintain the final dividend at the expected level of 12.64p and the shares go ex-dividend on April 23. That will of course be reflected to some degree in the share price at the time that the shares do go ex-dividend, but I believe that it also offsets some risk if you can pocket a dividend of that size, whilst still having a very good chance of your capital appreciating as and when things start to look brighter in terms of Covid-19 – any sort of news that lockdown restrictions may even partially lift over the next couple of months is certain to cause the FTSE100 index to rise, regardless of the actual economic situation. I also see a chance of funds buying into L&G over the next few weeks, or increasing their existing position, in order to be eligible for this dividend, and that should add at least some support to the share price, or even cause it to rise, depending on how the market in general performs over the next few weeks, and how low the FTSE100 potentially drops.
The recently published results showed that the company had done extremely well during 2019, with operating profit up by around 12% and post-tax profit, including mortality reserve release, also slightly higher at £1.834 billion, as well as big improvements to its solvency ratios – it had an excess of £7.3 billion over its solvency capital requirement. So although it will be paying out around £754 million in dividends, I would argue that still leaves it in a very strong position and with more than enough of a buffer to weather a downturn in business – although there are areas of its business which will carry on regardless of the current situation, for instance, people still need insurance as well as pension annuities.
At the present time nothing is truly safe and there is potential for pretty much any equity to go lower in the near term, but when things turn around I think that L&G will have a decent share price recovery, and in the meantime you will be able to pocket a decent dividend whilst waiting for that to happen. So I do see value down here, and on that basis the shares are a buy.
Filed under: Legal & General, Versarien, NMC Health, Rolls-Royce, GVC, Yu, Neill Ricketts, Tim Kempster
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