Questor: one clear fact amid L&G’s accounting mumbo-jumbo: a 7pc rise in the dividend

Richard Evans 10 August 2018 • 7:33am

Legal & General sign — L&G has a large 'bulk annuity' business Credit: Alessia Pierdomenico/REUTERS

Insurers’ accounts seldom make easy reading – they include such gems as “mortality reserve release” and “Solvency II operational surplus” – so we will focus first on one readily comprehensible fact in yesterday’s interim results from Legal & General: the half-year dividend grew by 7pc to 4.6p per share.

Even if the firm only maintained its final payment at last year’s 11.05p, the total of 15.65p would equate to a yield of 5.9pc at the current share price and 6.3pc at our Income Portfolio’s purchase price of 247p in January last year. Both figures comfortably exceed our 5pc target.

However, we can hope for more. “The 7pc growth in the [interim] dividend is solid but could be bolstered by greater growth at the final,” said Paul De’Ath, an analyst at Shore Capital, the stockbroker. He attributed his optimism to the likelihood of better annuity sales and possible releases of money held back in the annuity operations in case of increases in longevity.

Much of L&G’s annuity business now comes from the sale of “bulk annuities”, which final salary pension schemes use to take the uncertainty out of their liabilities. De’Ath said bulk annuity deals took a long time to finalise and sales could be “very lumpy” as a result.

“L&G has highlighted that the quote pipeline remains very strong and in fact it is in exclusive negotiations over £7bn of deals that could complete in the second half,” he added. This compares with the £1.1bn reported for the first half of the year.

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The release of excess annuity reserves could also be a matter of timing. “L&G [is] reviewing the mortality assumptions at the moment and stating that it expects to release an amount in the second half that will be larger than the £332m released last year,” the analyst said.

Overall operating profits grew by 5pc compared with the same period last year, disregarding the release of annuity reserves, although profits before tax fell by 19pc to £942m, partly because last year’s figure was flattered by such releases.

The prospects for the dividend make the shares a strong hold.

Update: Regional Reit

On July 20 we reported that Regional, which invests in property outside London, would issue retail bonds and use the proceeds to repay a more expensive form of debt.

The fundraising exercise was successful: investors bought £50m of the bonds, more than the £39.9m that will be needed to repay the Reit’s zero-dividend preference shares when they mature in January. The “zeroes” cost Regional 6.5pc a year, while the new retail bonds will cost 4.5pc.

The Reit’s manager said the extra amount raised would “enable us to reduce additional higher-cost debt facilities”.

Earlier this week the fund announced that it had booked a tidy profit on the sale of a development site in Leeds. Regional bought the site in 2016 along with an adjacent 19-storey office block. At the time the combined estate was valued at £10.5m.

It obtained an early surrender of the lease on the development site and worked with a partner, Unite Students, to obtain planning consent for a large-scale student housing development. Unite has now paid £12.2m for the site and Regional retains the office block, valued at £8.45m.

It has therefore turned £10.5m into £20.65m by judicious management of the property.

Stephen Inglis, a director of Regional Reit, said the transaction “illustrates how we actively manage the portfolio to create significant shareholder value”.

If Regional can carry on in the same vein, shareholders can expect decent capital gains in the long term, despite the fact that the shares, at 95.1p, stand 7.7pc below our purchase price of 103p. Net asset value is estimated at 103.1p per share, according to Morningstar, the investment analyst.

Any capital gains would come in addition to generous income: the fund paid a total dividend of 7.85p for the year to Dec 31, which equates to a yield of 7.6pc for readers who bought at the time of our tip.

The first quarterly dividend declared for the current financial year was 2.8pc higher than the equivalent payment last year, which bodes well for the full-year figure. A “hold” for the Income Portfolio.