Legal & General: A Steady Path to Double-Digit Returns Amid Uncertainty

Legal & General, one of the UK's largest insurers and asset managers, has positioned itself as a resilient player in an uncertain economic environment. With a robust capital structure, a rising dividend yield, and a focus on high-margin core businesses, the company is primed to deliver double-digit returns over the next three years—even as near-term risks loom. Let's dissect the factors driving this outlook.

A Fortress Balance Sheet Anchors Growth

Legal & General's financial resilience is underscored by its Solvency II coverage ratio, which rose to 232% as of early 2025, up from 224% a year earlier. This metric, a critical gauge of an insurer's ability to absorb shocks, signals a strong buffer against economic volatility. Pair this with a 6% increase in core operating profit to £1.6bn in Q1 2025, driven by its retail and institutional divisions, and the picture becomes clear: the company is well-capitalized to navigate headwinds.

Dividends and Buybacks: A Dual Engine of Returns

Investors seeking income will find much to like here. Legal & General has hiked its dividend by 5% year-on-year, with a final payout of 15.36p bringing the full-year total to 21.36p. The forward dividend yield of 8.9%—well above its ten-year average of 7.3%—provides an attractive entry point for income-focused portfolios.

But the real kicker is its share buyback program. The company has authorized an additional £500mn buyback, on top of £1bn from the sale of its US protection business. This not only boosts shareholder returns but also reduces dilution, a critical factor in a sector where capital management is king.

Strategic Focus on High-Margin Core Businesses

Legal & General is streamlining its operations to prioritize its pension risk transfer (PRT) and bulk annuity divisions—both of which are cash cows. PRT volumes hit £10.7bn in Q1, while retail annuity sales hit a record £2.1bn, demonstrating demand for these services. By divesting non-core assets like its US protection division, the company is channeling resources toward segments with superior margins and regulatory certainty.

Meanwhile, assets under management (AUM) dipped 2% to £1.1tn, but this reflects a deliberate pivot away from lower-margin products. This strategic shift, though temporarily impacting AUM figures, positions the company to generate higher returns on capital over the medium term.

Analyst Consensus: Buybacks + Dividends = Long-Term Value

Analysts are cautiously bullish. The forward P/E ratio of 10.4 remains reasonable relative to its historical average of 9.3, suggesting the market isn't yet pricing in the full upside of its capital returns. With £1.5bn allocated to buybacks and dividends in the next 12 months, the company is returning capital to shareholders at a clip that could support double-digit total returns, even if earnings growth remains modest.

Risks to Consider

No investment is without risk. Near-term headwinds include potential declines in annuity demand if interest rates fall further, and lingering underperformance in its asset management division. ESG transparency concerns—specifically around customer due diligence—are another red flag, though management's alignment of 30% of executive bonuses to ESG targets suggests progress is underway.

The Bottom Line: A Compelling Risk-Adjusted Opportunity

Despite these risks, Legal & General's fortress balance sheet, disciplined capital allocation, and focus on high-margin core businesses create a compelling risk-reward profile. Investors seeking a mix of income and capital appreciation should take note: the company's 8.9% dividend yield, buyback firepower, and earnings visibility in PRT and annuities argue for a buy-and-hold strategy.

For those with a three-year horizon, the path to double-digit returns is clear—provided the company executes on its strategy and the broader economy avoids a severe downturn. In a market starved for yield and stability, Legal & General's blend of defensive traits and growth catalysts makes it a standout pick.

Investment recommendation: Consider a gradual entry into Legal & General's shares, with a focus on accumulating positions during dips, while monitoring macroeconomic trends and ESG progress.