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Legal & General (LGEN) shares have surged 8.25% as I write this on Friday (7 February), and I couldn’t be happier. I’ve been waiting a while for this moment. In fact, I was digging in for a much longer wait, so this is an early bonus.
At first, I thought the FTSE 100 insurer and asset manager had published a bumper set of full-year results, but those don’t land until 12 March.
Instead, we got a blockbuster announcement: Legal & General is selling its US protection business to Japanese mutual insurer Meiji Yasuda for $2.3bn. In return, Meiji Yasuda will take a 5% stake in L&G.
Legal & General CEO António Simões called it a “transformative transaction” that brings both strategic and financial benefits.
It’s top of the FTSE 100 leader board!
It’s certainly transformed the Legal & General share price. It’s been sluggish for years, falling 5% over 12 months and 25% over five years. That’s despite a well-received update in December outlining £5bn to £6bn in Solvency II capital generation between 2025 and 2027.
Back then, I wrote that “I love my Legal & General shares even more after today’s exciting update”. Now, my devotion is being reciprocated.
FTSE 100 financials have struggled with stock market volatility, UK economic concerns and high interest rates. The latter made cash and bonds more attractive, but investing is cyclical, and that’s changing.
With the Bank of England cutting rates three times since August, and with more likely, cash and bond yields will fall. By contrast, Legal & General’s dividend yield still stands at a staggering 7.8%.
I’ve reinvested every dividend, building my stake more of the recovery. That happy day seems to be getting closer.
Under today’s deal, Meiji Yasuda will take over Legal & General’s US protection business and gain a 20% stake in its US Pension Risk Transfer (PRT) unit. Legal & General keeps 80% through reinsurance arrangements.
Legal & General plans to use £400m to fund US PRT reinsurance and – drum roll – pump a chunky £1bn into a new share buyback programme. That dwarfs the recent £200m one. The rest of the proceeds will be reinvested into the business, hopefully driving further growth.
I’m getting income as well as growth
Between 2025 and 2027, Legal & General expects to return around 40% of its market cap via dividends and buybacks. Given today’s £15bn cap, that’s £6bn. This should also ease concerns about dividend sustainability. High yields often signal trouble, but that doesn’t appear to be the case here.
One sticking point is valuation. The stock looks surprisingly expensive, trading at 32 times earnings. In August, Legal & General reported a 40% drop in half-year post-tax profit to £220m. Core operating profit edged up just £5m to £849m. It’s not firing on all cylinders yet. Maybe it never will.
Legal & General operates in a mature, competitive market at a tricky time for the global economy. Donald Trump’s trade tariffs threats and a potential UK recession risks add uncertainty. Buying today risks profit-takers pouncing.
I still see the long-term case strengthening. I bought L&G three times in 2023. My shares are up just 12.5% since then (most of that today), but my total return, including dividends, is closer to 25%.
No guarantees, of course. But if Legal & General delivers on its promises, today’s rally could be just the start.
