Legal & General: A Dividend Powerhouse in a Yield-Starved World

In a market where low interest rates have turned income-seeking investors into scavengers, Legal & General (LSE:LGEN) stands out as a rare oasis. Despite its shares lagging the broader market over the past five years, the insurer's total shareholder return (TSR) has soared 71%—thanks largely to its 8.6% dividend yield and disciplined capital allocation. For long-term investors willing to look beyond short-term price fluctuations, Legal & General offers a compelling case of value creation through dividends and strategic buybacks.

The TSR Paradox: Dividends Drive Value While Shares Lag

The numbers tell a story of dividend-driven resilience. Over the past five years, Legal & General's shares have risen just 16%, underperforming the FTSE 100 by 35%. Yet, when dividends are reinvested, the TSR jumps to 71%—a stark illustration of how income can offset stagnant capital gains. This is no accident: the company has prioritized returns to shareholders through a £5 billion buyback program (to run through 2027) and annual dividend hikes averaging 5% since 2020.

The buybacks are a critical piece of the puzzle. By reducing shares outstanding, Legal & General boosts earnings per share (EPS), creating a virtuous cycle where higher EPS supports both dividends and, over time, share prices. Even as the stock has flatlined, the dividend yield has climbed steadily—from 5.8% in 2020 to 8.6% today—making it one of the UK's most attractive income plays.

A Pullback Creates Opportunity

Recent volatility has handed investors a chance to buy at a discount. After a 10% rally in early 2025, shares retreated, closing June at 254.60p, down 0.5% on the month. This pullback, driven by macroeconomic concerns like rising inflation and regulatory uncertainty, has pushed the stock's price-to-book ratio to 0.75x, a 15-year low.

The dip presents an entry point for income-focused investors. With the dividend yield now above 8.5%—nearly double the FTSE 100's average—and the buyback program still in full swing, the stock's dividend cover ratio, though tight at 0.36x in 2023, is buoyed by £200 billion in assets under management and £18 billion in annual premiums. These cash flows provide a buffer against earnings volatility.

Risks to Consider

Legal & General is not without vulnerabilities. Its business is highly sensitive to interest rates, as low yields pressure its annuity pricing and investment returns. A prolonged period of sub-4% gilt yields could strain margins. Additionally, competition from peers like Aviva and Phoenix Group looms, and execution risks remain: CEO António Simões' restructuring plans, including a £50 billion expansion of its pension risk transfer (PRT) business, must deliver on cost savings and revenue growth.

The Investment Case: Income Over Immediate Gains

For investors with a 5+ year horizon, Legal & General's dividend profile is hard to ignore. At current prices, the stock offers a yield of 8.6%, with dividend growth projected to reach 9.6% by 2029. Pair this with the buybacks, which could lift EPS by 4-5% annually, and the stock begins to look mispriced relative to its income-generating capacity.

The key trade-off is time: the share price may remain stagnant if macro headwinds persist, but the compounding effect of dividends and buybacks should reward patience. A dollar-cost averaging strategy—gradually buying into dips—minimizes the risk of timing the market.

Final Verdict

Legal & General is not a stock for those chasing short-term capital gains. But for income investors seeking stability in a yield-starved world, it offers a rare blend of dividend security, balance sheet strength, and strategic discipline. While risks like rate hikes or regulatory changes linger, the math is clear: the company's focus on shareholder returns has turned lackluster share price performance into a TSR winner.

Recommendation: Hold for the dividend, buy on dips, and ignore the noise. This insurer's value is in the cash it returns—not just the chart it draws.

Disclosure: The analysis is based on publicly available data. Past performance does not guarantee future results.