Legal and General: a seasoned FTSE stock that still has potential

Legal & General has shifted its focus to becoming an asset-light, cash-generating company

Kaylie Pferten advises investors to pay attention.

One of the oldest businesses in the UK is Legal & General Group (LSE: LGEN). It is also one of the few that were included in the FTSE 100 when it was first established. Investors view the group as a slow-moving, steady beast that pays a steady, comparatively high dividend yield but rarely does anything to pique investors' interest. As Legal & General moves toward becoming an asset-light, higher-margin, faster-growth company, that is beginning to change.

The success of Legal & General can be attributed to its long-term savings and life insurance business model. One of the biggest providers of retirement, life insurance, and annuities in the nation, it operates under stringent regulations to guarantee that management manages the company sensibly and with an eye toward the long term.

This indicates that, in comparison to other blue chips, the business is rather dull but not unprofitable. With a yield that is consistently in the high single digits, Legal & General has made a name for itself as one of the top income stocks in the UK.

Typically, a dividend this high would be a red flag. Generally speaking, yields that are much higher than the market average suggest that investors don't think the payout is sustainable. However, in this instance, the market's misinterpretation of the business model is more to blame for the high yield and low valuation.

Legal & General is the biggest supplier of term life insurance in the UK and a strong leader in the bulk-purchase annuity market. Due to their financial complexity and multi-decade liabilities, both of these products are subject to strict regulation.

Strict guidelines dictate how much capital the business must have in order to pay its debts. Determining how much money a bulk annuity purchase or a term life insurance product will bring in over ten or twenty years is difficult, even for the most experienced financial analysts.

To see that this is a problem that affects more than just Legal & General, simply look at the firm's peers. Standard Life (formerly Phoenix), Just Group, and Chesnara are all inexpensive and have large yields. Because of the severity of the issue, private equity firm Brookfield recently made a 75% premium offer to purchase Just. Additionally, Standard Life has chosen to change its name from the previous Phoenix brand, which was associated with closed-book consolidation, in order to concentrate on its more visible pension products.

This is not a UK-only issue. Last year, Brighthouse Financial, a US company that separated from MetLife in 2017 to concentrate on retail life insurance, was purchased for a 55 percent premium. Apollo, a major private equity firm, paid 20% more for Athene in 2022. Athora, supported by Athene, is currently negotiating a £5.7 billion acquisition of the UK's Pension Insurance Corporation.

Jackson Financial, which was spun off in 2021 as the US division of London-listed Prudential, has been so neglected that management has been able to use cash flow to purchase 40% of the outstanding shares over the last five years in addition to paying a substantial dividend.

Both the times and Legal & General are evolving.

Legal & General is growing less dependent on its life insurance, pension buyout, and bulk annuity businesses. Rather, a growing portion of profit is being driven by its retail and asset-management divisions. Legal & General is one of the biggest investment management companies in the United Kingdom, managing 1.2 trillion assets.

It oversees a growing portfolio of private assets, funds for foreign clients, and the funds associated with the defined-contribution (DC) pension plans it oversees. Last year, its private-market assets increased from 57 billion to 75 billion, contributing to an increase in the overall fee margin on assets under management from 8.8 basis points to 9.1.

Future growth will be significantly influenced by the group's workplace defined-contribution pension plan. The Pensions Policy Institute estimates that the total value of workplace assets in the private sector could increase from approximately 1.2 trillion in 2025 to approximately 2.2 trillion in 2045, or, in the best case, 4.4 trillion. Additionally, there will be a lot of consolidation among the big players. There will only be 15 to 20 sizable DC "mega-funds" in the market by 2035, compared to the current number of over 60 providers.

In 2025, Legal & General's workplace DC assets under administration increased by 21% to £114 billion. Net flows came to a mere 6.2 billion dollars. However, the group anticipates 40 billion to 50 billion in net flows by 2028, and management feels that workplace saving is now the "core customer acquisition engine" of the company. The group's retail division offers retail insurance products, lifetime mortgages, and annuities.

Additional sources of income indicate that the company is operating at full capacity. The group reported a contractual service margin (CSM) of 12.4 billion in the institutional retirement segment, which is up 2% from the previous year. This is the unearned income, or about 214p per share, net of tax, that the group believes it will produce from its book of annuities.

Along with the company's 2025 results, which were the biggest in the group's history, management announced a 1.2 billion share buyback in addition to a 2 percent dividend increase. This year's total cash returns will be £2.4 billion, and management has stated that it anticipates £5 billion in shareholder returns between 2025 and 2027, or 35% of the company's market value.

According to these estimates, shares are trading at a historical price-to-earnings (p/e) ratio of 11.9 and a total shareholder yield of 16.7 percent for 2026. However, the group's forecast CSM emphasizes that this does not take long-term profit-generation potential into account. Legal & General is still making the shift to a cash-generating, asset-light company. Investors need to be aware.

Chart of share prices for Legal & General Group.

A shareholder in Legal & General is Kaylie Pferten.