Legal & General Shares Plunge to 9% Yield: Is It Time to Buy?

Legal & General (LSE: LGEN) has experienced a significant drop in its share price, falling from 266p to 243p in recent weeks. This decline has pushed the company’s dividend yield back to approximately 9%, raising questions among investors about the viability of buying into the stock at this level.

Understanding the Appeal of a 9% Yield

A 9% yield is undeniably attractive in the current market, especially as it exceeds the average yield of the FTSE 100 by more than double. However, potential investors should approach this opportunity with caution. In the realm of investments, high yields often come with increased risks that must be evaluated thoroughly.

The primary concern for investors is the company’s low dividend coverage ratio, which is projected to fall below 1 this year. A ratio under one is a concerning indicator, suggesting that the company’s earnings may not sufficiently cover its dividend payments. In such cases, a dividend cut could become inevitable, leading to disappointing returns and potential share price declines.

Evaluating Risks: Gilt Market Concerns

Another factor influencing Legal & General’s stock is the current volatility in the UK gilt market. Recently, long-term UK borrowing costs reached their highest point since 1998, heightening concerns over the nation’s economic outlook. This situation coincided with the downturn in Legal & General’s share price, suggesting that institutional investors are wary of the insurer’s exposure to fixed income holdings.

Legal & General plays a significant role in the liability-driven investment (LDI) sector, which involves projecting future liabilities—such as those of pension schemes—and generating returns to meet those obligations. Volatility in the gilt market can lead to margin calls on gilt derivatives held by LDI investors, affecting liquidity and balance sheets. This situation poses risks not only to dividend sustainability but also to the overall financial health of the company.

Despite these uncertainties, some analysts believe that Legal & General may still hold long-term potential. The company benefits from rising equity markets, which could positively impact its investment management division. Additionally, growth in the pension risk transfer (PRT) industry and alternative investment markets could provide further opportunities.

While share buybacks could enhance earnings per share, investors should weigh these potential benefits against the current balance sheet risks. The recent share price movements indicate that institutional investors—often referred to as the “smart money”—are exercising caution regarding Legal & General’s stock.

In conclusion, while the appeal of a 9% dividend yield is strong, the underlying risks associated with Legal & General’s financial health and market exposure cannot be overlooked. Investors may wish to consider other dividend stocks that present a more stable outlook before making a decision.