Legal & General Group Plc: Is the 8.9% Dividend Yield a Golden Opportunity or a Red Flag?

Legal & General Group Plc (LGEN) has long been a beacon for income-focused investors, offering a dividend yield of 8.9% as of May 2025. However, beneath the surface lies a critical question: Can this insurer and asset manager sustain payouts when its dividend payout ratio has spiked to a staggering 740% of trailing earnings? This article dissects the sustainability of Legal & General’s dividend strategy, weighing risks against opportunities in its financial health and governance.

The Dividend Paradox: High Yield vs. High Risk

Legal & General’s dividend yield has surged to 8.9%, making it one of the highest among UK financial services stocks. This attracts income investors, but the payout ratio—740% of trailing earnings—raises eyebrows. To put this in perspective, a payout ratio above 100% means dividends exceed current earnings, signaling reliance on reserves, asset sales, or debt to fund payouts.

The company has addressed this partially through strategic moves:
- A £500 million buyback announced in 2024 to boost shareholder returns.
- Proceeds from asset sales, such as the divestiture of Cala Homes, which contributed to capital flexibility.
- A focus on solvency improvements, with its Solvency II ratio rising to 232% in 2024, providing a buffer against volatility.

However, trailing earnings remain under pressure. The payout ratio has been mitigated to 86.6% when using forward estimates, but this hinges on aggressive growth assumptions. If earnings falter, the dividend could face cuts—a nightmare for income investors.

Governance Stability and Strategic Shifts

Post its 2025 Annual General Meeting, Legal & General reaffirmed its shareholder-friendly stance:
- A £200 million buyback in 2024 and plans for further repurchases through 2027, signaling confidence in its balance sheet.
- A dividend growth path of 5% in 2024, followed by 2% annual increases, balanced against capital efficiency goals.

The board’s stability matters. Management’s focus on “Sharper Focus”—streamlining divisions like Asset Management while prioritizing high-margin areas like Workplace DC pensions and annuities—could stabilize margins. Institutional Retirement, a key division, grew operating profit by 7% in 2024, driven by £10.7 billion in Pension Risk Transfer deals.

Reconciling Analyst Ratings: Neutral vs. Buy

While Spark Ratings labels Legal & General “Neutral” due to payout sustainability concerns, buy-side analysts are bullish, citing dividend resilience and valuation. Key points of contention:
- Risks: Declining revenues in Asset Management (-10% in 2024) and high leverage (net debt/EBITDA at 2.1x).
- Opportunities: Dividend funding via asset-light strategies (e.g., private markets growth) and a 92% combined ratio in P&C insurance, signaling operational efficiency.

Analysts argue that the 8.9% yield is justified if the company can grow earnings through its “Lifetime Partner 27” strategy, targeting 8-10% EPS CAGR through 2027. The stock’s price-to-book ratio of 0.65x also suggests undervaluation relative to peers.

Risks to Consider

1. Earnings Dependence on Asset Sales: Revenue from non-core assets, like Cala Homes, may not recur, pressuring core earnings.
2. Interest Rate Sensitivity: High annuity sales (a record £2.1 billion in 2024) thrive in high-rate environments, but prolonged rate hikes could strain mortgage-backed liabilities.
3. Payout Ratio Volatility: A one-time drop in earnings could push the payout ratio to unsustainable levels, risking dividend cuts.

The Bottom Line: Income Play or Warning Sign?

Legal & General’s 8.9% yield is undeniably tempting, but investors must weigh the risks:
- For bulls: The dividend is supported by £14.8 billion in “Store of Future Profits,” strong solvency, and a disciplined buyback plan. The yield could remain robust if strategic shifts (e.g., Workplace DC growth, private markets) boost earnings.
- For bears: The 740% payout ratio and declining Asset Management profits highlight fragility. A prolonged earnings slump could force a payout cut, eroding the stock’s appeal.

Conclusion: Legal & General presents a high-risk, high-reward proposition. The dividend’s sustainability hinges on execution of its growth strategy and earnings resilience. Investors seeking income may find the yield compelling, but they must monitor earnings trends and capital returns closely. For now, it’s a hold—ideal for those willing to tolerate volatility but wary of overextending into this dividend darling’s risky allure.