In the world of investment, the search for passive income opportunities often leads investors to consider a stock's yield as a key metric. This is precisely what piqued my interest in Legal & General's shares, with their impressive 8.9% yield. But is there more to this story than meets the eye? Let's delve into the recent results and uncover some intriguing insights.
Unraveling the Results
Today's results from Legal & General for the year 2025 reveal an increased dividend of 2%, now standing at 21.79p per share. This, coupled with the stock's high yield, makes it an attractive prospect. However, a deeper look into the numbers raises some interesting questions.
A Journey Back in Time
To fully grasp the significance of today's announcement, we must revisit the events of 2022. Legal & General's FY22 results showed an EPS of 36.49p and a dividend of 19.37p, with a book value of £12.14 billion. At that time, the stock was trading at a reasonable 6.8 times its earnings and had a price-to-book ratio of 1.2.
Fast forward to FY25, and the picture seems to have changed dramatically. The stock's multiple has skyrocketed to 25.1, and its price-to-book ratio is now 6.1. At first glance, it appears that Legal & General's shares have become significantly more expensive.
Uncovering the Details
However, a closer examination reveals a different story. In January 2023, a change in international accounting standards altered the way insurance contracts were treated. This change, while purely presentational and backward-looking, had a significant impact on Legal & General's financial statements. Overnight, the group's book value was reduced by more than half, from £12.14 billion to £5.53 billion, and its EPS was slashed to 12.47p from the previously reported 36.49p.
This adjustment highlights the importance of understanding the nuances of accounting standards. It also underscores the challenge of comparing the group's accounts across different periods, making it difficult to draw meaningful conclusions.
Making Sense of the Numbers
To provide some clarity, Legal & General now reports its store of future profit, which stood at £13.31 billion as of December 31, 2025, up from £13.17 billion the previous year. This figure, however, only covers about two-thirds of its business, excluding its wealth management arm. When we consider the earnings from this division and apply a reasonable multiple, the resulting value exceeds the group's current market capitalization of £13.9 billion.
This analysis suggests that the stock is potentially undervalued. Combined with the attractive dividend yield, it presents a compelling case for investors to consider adding Legal & General's shares to their portfolios.
Navigating the Challenges
While the group appears to be successfully navigating the challenges posed by low-cost market entrants, competition is likely to intensify. Today's results also serve as a reminder of Legal & General's significant investment in stocks and bonds. A small adverse movement in the value of these investments could have a substantial impact, exceeding the group's current market cap.
Final Thoughts
Despite my positive outlook, I don't anticipate significant share price growth. The modest increase in the estimate of future profit indicates a steady, rather than explosive, performance. While I don't foresee any imminent dividend cuts, I also don't see the share price soaring. Nevertheless, I'm not ready to sell my position just yet.
In my opinion, Legal & General's shares offer a unique combination of an attractive yield and potential undervaluation. As an investor, I find this an intriguing prospect, and I'll be watching the group's progress with interest.
