Questor share tip: L&G eurozone exposure is minimal

Looking at a graph of Legal & General's share price over the past few months, it has tracked the FTSE 100 almost to a pip. With the insurer being the largest investor in the FTSE 100, that is hardly a surprise.

Legal & General
107½p +4.9
Questor says BUY

The shares fell sharply this week as European financials plunged following Greece's decision to hold a referendum on its rescue plan. However, L&G's exposure to European sovereign debt is pretty minimal.

As of June 30, its holdings of government debt in Portugal, Ireland, Italy, Greece and Spain was just £300m out of total assets of £35.1bn. This is just 0.8pc of its total assets.

European default per se will not be a significant problem for the group – it will be its effect on the wider European economy as a whole that affects L&G.

However, even in a very negative scenario, the shares should be supported by the company's
cash generation.

Indeed, the life insurer revealed this week in its trading update that cash generation this year was expected to be even better than hoped. This was the most significant part of the company's statement.

The insurer should now easily beat its full-year cash target. L&G's nine-month net cash generation rose 17pc to 631m. Its full-year target is £700m, but it could come in as high as £900m.

This cash-generating ability – which means the dividend should be secure – helped mitigate some disappointment surrounding a slight dip in sales to £1.33bn from £1.34bn. The figure was, however, in live with consensus.

"We are confident we can continue to grow from a position of strength while increasing our balance sheet strength and, at the same time, supporting a growing dividend," said Tim Breedon,
chief executive.

However, sales growth is still expected this year, as the group recently signed a bulk £1.1bn deal with the trustees of the Turner & Newall pension scheme, which will be included in the fourth-quarter numbers.

The scheme is closed to new members and has been for some time. L&G will gradually wind it up while providing members with an annuity that pays more than they currently receive. The insurer will profit by "managing the assets more efficiently".

Revenues have been subdued by the weak housing market. Typically, it is a requirement of mortgage companies that people buying property also have life cover. The group is trying to increase sales of savings and pensions products to counter this. L&G has come a long way since March 2009, when it was forced to cut its dividend payments for the first time in its history. Management have been focusing on simplifying its structure and moving away from capital-intensive products such as
unit-linked bonds.

Mr Breedon will retire at the end of next year and a hunt for a successor has started. There is plenty of time, as he does not leave until the end of 2012.

The shares were tipped as a buy at 119.4p on May 5 this year and they are down 1pc compared with a FTSE 100 down 7pc. The shares are a yielding prospective 5.6pc this year, rising to 6.3pc next year. Trading on an earnings multiple of 8.1, falling to 7.4, the shares remain a buy for income.