Legal & General’s dividend growth streak comes to an end (if only temporarily)

“And then there were thirteen. Rather like the number of guests in an Agatha Christie country house, the list of FTSE 100 firms that can point to a growth streak of at least ten years continues to shrink, with Legal & General the latest departure,” says Russ Mould, AJ Bell Investment Director. “A year ago, 26 FTSE 100 members could point to a string of at least ten consecutive dividend increases but thin earnings cover, the pandemic and the recession have all taken their toll, while in one or two cases changes in group structure have been the reason, notably SSE and Prudential.

Source: Company accounts

“Legal & General will nevertheless pay an unchanged dividend in 2020 and the 17.57p-a-share distribution still equates to a yield of 7.6%, which should keep income-seekers happy. It is still enough, based on analysts’ consensus forecasts, to make Legal & General the seventh-highest yielding stock in the FTSE 100 for this year.

Source: Sharecast, consensus analysts’ forecasts, Refinitiv data

“Moreover, chief executive Nigel Wilson is targeting low-to-mid single- digit percentage growth in the annual dividend for each year across 2021 to 2024 and a totally payout of £5.6 billion to £5.9 billion. That compares to a market cap of £13.7 billion and suggests there is still a lot here to assuage investors’ hunger for yield in a low-interest-rate, low-bond-yield world.

“Nevertheless, the new projected growth rate is much lower than the one to which the life insurance giant’s shareholders had become accustomed

 
Source: Company accounts, management guidance for 2020E

“This is because the company intends to grow earnings and cash flow faster than it increases its dividend. Legal & General will therefore be looking to invest in its operations to maximise their potential but this may also be a tacit admission that the company was overdistributing when it came to dividends. Earnings cover had begun to improve but was still below the 2.00 times threshold which gives management and shareholders alike reassurance that the business may not be straining too hard to make its payments and that they are safe in the event of any unexpected setback for either internal or external reasons.

 
Source: Company accounts, Sharecast, consensus analysts' forecasts, management guidance for 2020E dividend. Based on adjusted rather than statutory earnings per share (EPS).

“Relatively thin earnings cover had been a long-running concern across the whole FTSE 100 for some time, too. The yield had always looked generous but the risk remained that any exogenous shock, such as a recession, could knock profits and cash flow off course and leave dividend payments exposed. So it has proved, with even half of those firms with superb long-term dividend growth records feeling obliged to take a more cautious view, hunker down and preserve cash.

 
Source: Company accounts, Sharecast, consensus analysts' forecasts. Based on adjusted rather than statutory earnings per share (EPS).

“As a result, FTSE 100 earnings cover is currently expected to improve markedly in 2021E, even as payments are expected to rebound by some 20%. Although cover will still be lower than optimal at 1.74 times, if consensus forecasts for earnings and dividends prove to be accurate, the increase may help to give investors some confidence that estimates of a 3.9% yield for the FTSE 100 in 2021 are reliable.”