Losing its chief could have left this company vulnerable – but it remains buoyant and healthy

The departure of a chief executive who has contributed to a 600pc total shareholder return during their employment is cause for investor concern. After all, they are likely to have had a significant impact on the business through their input in strategy, operational issues and countless other areas.

Although their departure does not necessarily mean the end of buoyant investment performance, it can prompt a period of share price volatility and even, in some cases, demise.

As such, this column is cognisant of the potential impact that Sir Nigel Wilson’s recent decision to retire as chief executive of Legal & General could have on its future prospects. Having joined the company as the finance chief in 2009, he took the helm in 2012 and has been a key part of its aforementioned investment success.

Indeed, the stock has delivered a total return of around 45pc since being added to our income portfolio in January 2017. During that time, it has provided a highly resilient income stream in spite of major economic and political challenges such as the pandemic and Russia’s invasion of Ukraine that prompted many other large-cap shares to either reduce, postpone or cancel their dividend payouts.

Furthermore, dividends per share have grown at an annualised rate of 5.2pc since our notional purchase nsix years ago. In doing so, they have provided a degree of protection against elevated levels of inflation that make them even more attractive in an ongoing period where rampant price rises are widely expected to remain present.

Shareholder payouts continue to be well covered by profit, with the company’s payout ratio standing at around 54pc last year. This suggests that dividends are likely to remain resilient even as an increasingly uncertain global economic outlook continues. In fact, the company’s most recent trading update stated that it is on track to meet financial guidance for the full year, with operating profit growth of 8pc expected to be in line with that achieved in the first half of the year.

The company’s strategy has the potential to deliver further profit and dividend growth over the long run. Its pension risk transfer (PRT) business, which is essentially an insurance policy provided to pension schemes that guarantees retirement benefits will be paid, had either transacted or was in exclusive negotiations on £9.3bn of business by November last year. This compares with £7.2bn of PRT business secured in the prior full year.

In addition, its investment management arm is likely to be a beneficiary of an improving outlook for the stock market. Although elevated volatility is almost a given for risk assets in the short run as the economy’s prospects are highly uncertain, a moderation in the rate of inflation is set to ultimately prompt less hawkish monetary policy that acts as a positive catalyst on global asset prices.

The prospect of greater investment flexibility due to proposed Solvency II reform, which centres on reducing the amount of capital insurers must hold to guard against economic shocks, also means the long-term outlook for the company’s bottom line remains highly positive. If implemented, it would provide greater scope to make major investments that are aligned with the company’s focus on areas such as sustainability.

Despite Legal & General’s upbeat growth prospects and attractive total returns over recent years, its shares continue to trade on a low valuation. For example, it has a price-to-earnings ratio of 7.5 and a dividend yield of 7.2pc. At a time when many FTSE 100 shares trade on significantly higher valuations and far lower yields as the index basks at a record high, the company’s shares continue to offer a wide margin of safety.

In Questor’s view, this makes them highly appealing on a long-term view. Certainly, a change in chief executive after a highly successful period and an uncertain global economic outlook could prompt heightened volatility in the short run. But with an excellent track record of robust dividends that have grown at a relatively fast pace, as well as a sound strategy to capitalise on attractive growth opportunities in the coming years, the stock remains a key holding in our income portfolio. 

Questor says: hold

Ticker: LGEN

Share price at close: 256p

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