Buy Legal & General stock for its safe 7.90% dividend yield

Legal & General (LON: LGEN) share price has moved sideways in the past few months amid rising economic instability in the UK. The stock was trading at 230p on Wednesday, ~12% above the lowest level this year and ~9.6% below the highest point this year.

Is the dividend worth the risk?

Legal & General is a leading company in finance. It is the biggest asset manager in the UK with over £1.2 trillion in assets under management (AUM). The company operates in key segments like institutional retirement services, capital investment, investment management, and retail. Its retail business has over 6.3 million life insurance customers.

Legal & General’s business has been doing well in the past few years. Its profit before tax jumped to £2.7 billion in 2022 from the previous £2.6 billion. The company’s profit at the height of the pandemic was about £1.5 billion.

LGEN stock price has underperformed for a few reasons. First, there are serious concerns about the incoming CEO, Antonio Simoes. Antonio is a highly experienced professional who has worked in Santander, HSBC, and McKinsey. As such, he has no experience running an insurer or an asset management company.

Second, there are still concerns about instability in the UK. The country has gone through major challenges like Brexit, Mini-budget, and the ongoing Thames Water issue. The UK is seeing one of the highest inflation rate in Europe.

Further, there have been concerns about the asset management industry in Europe. Legal & General has done well in this regard. The most recent results showed that its external inflows jumped by £49.6 billion.

Legal & General dividend 

Legal & General is not a growth-oriented company. Therefore, most people buy the company for its dividend. It has a dividend yield of almost 8%, which is higher than what many UK companies are yielding. Its dividend grew by 5% in 2022 to 19.37p.

The dividends are safe since the company is still seeing strong earnings. It is also in a strong financial footing, with a return on equity of 20.7% and a solvency coverage ratio of 236%. The company hopes to generate more cash in the next few years. 

Most importantly, LGEM is a highly undervalued company. Think about this. It has a market cap of more than £13.71 billion and annual profits and operating profit of over £2.5 billion. This means that it has a price-to-operating profit ratio of less than 6.

To be clear, I don’t expect the Legal & General share price to go parabolic in the next few years. Instead, I expect the shares to hold quite steady as it has done in the past few years. The main reason to invest in it is because of its strong dividend yield.