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Insurer Legal & General is a cornerstone of income investors portfolios with the shares offering the highest dividend yield in the blue-chip FTSE 100 index, currently around 8%.
L&G is a good example of the powerful effect of reinvesting dividends on total shareholder return.
While the share price performance looks uninspiring over the last five years, down around 3%, the total return including dividends has been a respectable 43%, although it has lagged the FTSE 100’s 76% return.
A high dividend yield can be a signal that investors expect the dividend to be cut, but a high yield can also just be a function of a sluggish share price.
Why Jefferies has recently raised questions over the dividend
Analysts at investment bank Jefferies recently downgraded L&G, arguing the company’s income story is deteriorating based on a flat forecast for free cash flow generation through 2028.
The analysts point out that their forecasts sit around 8% below consensus estimates for net surplus cash generation (a proxy for free cash flow) and 10 percentage points below consensus estimates for regulatory solvency ratios.
As this distance from consensus estimates indicates, Jefferies’ take is a deviation from the broader view of the business and L&G recently announced a £1.2 billion share buyback, the largest in its history, and has committed to returning more than £5 billion to shareholders between 2025 to 2027.
The lion’s share of the share buyback is returning proceeds from the sale of L&G’s US insurance business to Meiji Yasuda for approximately £1.8 billion, with the rest earmarked for business growth.
Including a 2% increase in the divided, L&G anticipates returning a total of £2.4 billion to shareholders in 2026, equating to around 16% of the company’s current market value.
Which financial metrics are the most important?
When evaluating insurance companies, the standard accounting dividend cover (earnings per share divided by earnings per share) can be misleading due to non-cash market movements required by IFRS (International Financial Reporting Standards) rules.
Instead, analysts and management judge dividend safety by looking at the amount of capital the business generates from operations alongside regulatory solvency coverage (the amount of surplus capital the business holds above the minimum).
In its full year results on 11 March L&G revealed operating surplus capital of £1.5 billion or 26.78p per share, up 8% and a dividend of 21.79p per share, which equates to a dividend cover of 1.2 times.
This means L&G generated roughly 23% more regulatory capital than it paid in dividends, before considering future growth capital. Net operating surplus capital generation was £1.3 billion.
Core operating profit grew 6% to $1.6 billion and core operating earnings per share grew 9% to 20.93p.
What does the balance sheet look like?
The ultimate health of the balance sheet is determined by the amount of capital L&G holds over and above the regulatory minimum solvency requirement, measured as a percentage. For L&G this stands at a healthy 210%.
Solvency coverage dipped from 230% in 2025 due to reallocation of capital to fund the share buyback.
The company operates a self-imposed solvency coverage ‘buffer zone’ of between 160% to 190% which means it is sitting 20 percentage points above the top end of the range and 110% above the regulatory minimum.
In summary, the most important metrics to follow for L&G are operating surplus capital per share, solvency ratio and core operating earnings per share.
Management believes the business can sustainably grow the dividend by around 2% a year, which is lower than the expected growth in capital generation. This means the dividend payout ratio, or proportion of earnings and cash flow paid out to shareholders, should naturally fall over time.
What is L&G’s strategy?
L&G is well positioned to benefit from structural tailwinds driven by ageing populations, and corporate demand to de-risk balance sheets. This means demand for workplace retirement solutions and bulk annuities is almost guaranteed to grow over the next couple of decades.
Under CEO António Simões, L&G is undergoing a strategic refresh designed to simplify the group and unlock hidden value. The direction of travel is towards a leaner, asset-light fee earner.
Simplification involves selling non-core capital-heavy assets including the high-profile £1.16 billion divestment of UK housebuilder Cala group and the $2.3 billion sale of its US insurance entity.
These actions free up capital to support the core capital return policy and provide funds to invest in growth.
Three strategic pillars
L&G’s core profit engine comes from its global leadership position in PRT (pension risk transfers), sometimes referred to as bulk annuities. It is the UK’s largest annuities provider generating 2025 volumes of $13.6 billion.
These work just like individual annuities which involve people giving their pension assets to an insurance company in return for a guaranteed income for life.
L&G does this for defined benefit pension schemes which are looking to outsource investment risk. One of the biggest PRT deals in the last few years was Boots’ £4.8 billion full scheme buy in, which secured benefits for 53,000 retirees and deferred members.
The company is aiming to secure £50 billion to £65 billion in cumulative UK PRT volumes by 2028, while also scaling up its footprint in the higher growth US and Canadian corporate pension markets.
A second pillar of the recent strategy refresh was to combine Legal & General Investment Management and Legal & General Capital into a single, unified global asset management business, managing roughly £1.2 trillion.
The plan is to shift away from low-margin passive products towards higher margin private markets, including credit, real estate and infrastructure.
L&G is targeting asset management operating profits of between £500 million and £600 million by 2028.
The third pillar is retail where L&G is looking to exploit its workplace defined contribution pension platform to capture millions of employees early on in their careers.
The retail strategy is to cross-sell savings, life insurance and retirement drawdown pots to corporate members. The company is targeting £40 to £50 billion in cumulative net flows into the workplace pension business through 2028.
What risk factors should investors consider?
Persistent geopolitical tensions and energy market shocks threaten to keep inflation and interest rates higher for longer. This scenario has both good and bad points for L&G’s business.
On the one hand, higher interest rates are good because they lower L&G’s liabilities which are essentially annuity obligations discounted by a higher discount rate.
On the other hand, higher interest rates make cash deposits and easy-access savings accounts more attractive.
This can cause income investors to favour risk-free cash over riskier dividends, putting pressure on share prices.
Higher interest rates could tip the global economy into recession, which might expose credit risks in L&G’s investment portfolios and real estate assets.
Almost all private sector defined benefit pension schemes closed their doors to new members decades ago, which means they will eventually disappear.
One of the core assumptions underpinning L&G’s pension assets is life expectancy. Breakthroughs in medical science from AI could result in people living longer than L&G’s actuarial models predict.
This means the company may end up paying more than expected, eroding long-term profitability.
How L&G stacks up against peers?
L&G has the biggest dividend yield and one of the lowest PE ratios among UK and European peers. Over the last five years dividend growth has been lacklustre for L&G compared with Aviva and European insurers AXA and Allianz, which have grown dividends by double-digits.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
