The UK financial services market is in decent overall shape. Greater awareness of the need for bigger pensions to provide for an ageing population, as well as robust economic growth and a strong housing market, have helped the savings, protection and investment market deliver compound annual growth of more than 9% a year over the last ten years. Combined with the continuing stimulus from the ‘A-day’ regulatory changes to pensions and the increasing popularity of of self-invested personal pensions (Sipps), the economic and demographic fundamentals should continue to provide a favourable backdrop for the sector. And there are plenty more reasons why this particular financial is a buy:
Tip of the week: Evolution says BUY Legal & General (L&G)
Legal and General provides life and general insurance products and investment management services. It has more than 5.7 million customers, generating around 90% of its turnover in the UK. Earnings per share are forecast to be 13.2p this year, rising by 12% to 14.9p in 2008. Even so, like many of its brethren in the FTSE 100, the firm has been largely ignored by the City over the past six months as it is not considered a prime takeover target. Consequently, the shares trade on a miserly 2007 p/e multiple of 11.3 and pay a dividend of 3.7%. To me – despite lack of interest from the City – Legal and General is a solid business offering good long-term value.
Statistics from the Association of British Insurers show that Legal and General has grown total UK market share from 4% in 1995 to over 11%. This track record is built on a solid brand and consistent outperformance. Recent distribution deals signed with Nationwide and Intelligent Finance, and news in April that the firm had made a good start to 2007 should help to underpin 2007 City estimates. Chief executive Tim Breedon commented that “We remain confident of further profitable growth, given the favourable climate for our business.”
However, there are risks. Legal and General is a significant provider of term-assurance and critical-illness products that are typically bought alongside houses. So any prolonged downturn in the property market could affect earnings. The company is also a leading provider of index-tracking funds to pension schemes and retail customers. These fees are directly linked to the value of funds under management so any significant fall in their value would also affect earnings. Finally, Legal and General is subject to investment and regulatory risk and the potential cost of claims on its non-life insurance products is uncertain: the firm was, for example, a major writer of endowment mortgages.
Yet the potential upside on the shares from these downtrodden levels looks attractive. Underlying earnings are forecast to improve, which should drive good dividend growth in the medium term. Legal and General has already said it is planning to return around £1bn to investors, with further details due at the interim results in the summer.
Recommendation: LONG-TERM BUY at 150p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments