Legal & General: a veteran FTSE stock with life in it yet
Legal & General has changed its focus to a cash-generative, asset-light business. Investors should take note, says Rupert Hargreaves
Legal & General Group (LSE: LGEN) is one of the oldest companies in the UK. It's also one of the few remaining that formed part of the FTSE 100 at the time of its inception. The group is known among investors as a slow-and-steady beast that pays a consistent, relatively high dividend yield, but hardly does anything to get the pulse racing. That is starting to change as Legal & General transitions towards an asset-light, higher-margin, faster-growth business.
Legal & General's longevity is down to its business model: life insurance and long-term savings. It is one of the largest retirement, life-insurance, and annuity providers in the country, operating under strict rules to ensure management runs the business prudently with a long-term mindset.
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Usually, such a high dividend would be a warning sign. Yields significantly higher than the market average usually indicate that investors believe the payout is unsustainable. In this case, however, the high yield and low valuation are more a reflection of the market misunderstanding the business model.
Legal & General is a dominant leader in the bulk-purchase annuity market and the largest provider of term life insurance in the UK. Both of these products are financially complex, involving multi-decade liabilities and, as a result, are heavily regulated.
There are strict rules governing how much capital the company must hold to meet its liabilities. Even for the most sophisticated financial analysts, determining how much revenue a bulk-annuity purchase or a term life-insurance product will generate over ten or 20 years is not straightforward.
You only need look at the firm's peers to understand this isn't a problem affecting only Legal & General. Chesnara, Standard Life (formerly Phoenix) and Just Group are all cheap and offer high yields. The problem is so bad that private-equity group Brookfield recently offered a 75% premium to buy Just. Standard Life has also decided to rename the company to focus on its more visible pension products, moving away from the old Phoenix brand, which was known as a closed-book consolidator.
This isn't just a problem in the UK. In the US, Brighthouse Financial (originally spun off from MetLife in 2017 to focus on retail life insurance) was acquired last year for a 55% premium. Athene was acquired by private-equity giant Apollo in 2022 for a 20% premium. Athene-backed Athora is in the process of acquiring the UK's Pension Insurance Corporation for £5.7 billion.
Jackson Financial, formerly the US arm of London-listed Prudential, spun off in 2021, has been so neglected that management has been able to acquire 40% of the outstanding shares in the past five years from cash flow as well as distributing a handsome dividend.
Times are changing, and so is Legal & General
Legal & General is becoming increasingly less reliant on its bulk-annuity, pension-buyout and life-insurance businesses. Instead, its asset-management and retail arms are driving an increasing share of profit. With £1.2 trillion of assets under management, Legal & General is one of the UK's largest investment-management firms.
It manages the funds attached to the defined-contribution (DC) pension schemes it manages, funds for international clients and a growing portfolio of private assets. Its private-market assets grew from £57 billion to £75 billion last year, which helped the overall fee margin on assets under management rise from 8.8 basis points to 9.1.
The group's workplace defined-contribution pension platform will be a key driver of growth going forward. According to the Pensions Policy Institute, the aggregate value of private-sector workplace assets could grow from around £1.2 trillion in 2025 to around £2.2 trillion in 2045, or £4.4 trillion in a best-case scenario. There will also be significant consolidation among the major players. By 2035, the market is projected to comprise only 15 to 20 large DC “mega-funds”, down from more than 60 providers today.
Legal & General's workplace DC assets under administration rose 21% to £114 billion in 2025. Net flows totalled just £6.2 billion. But management believes workplace saving is now the group's “core customer acquisition engine” and the group expects £40 billion to £50 billion in net flows by 2028. The group's retail arm includes annuities, lifetime mortgage and retail insurance products.
Other revenue streams also suggest the business is firing on all cylinders. In the institutional retirement arm, the group has flagged a contractual service margin (CSM) of £12.4 billion, up 2% year on year. This is the unearned income the group is forecasting it will generate from its book of annuities – equivalent to roughly 214p per share, net of tax.
Management announced a £1.2 billion share buyback alongside the company's 2025 results – the largest in the group's history – on top of a 2% dividend hike. Total cash returns this year will come in at £2.4 billion, with management saying it expects £5 billion of shareholder returns from 2025 to 2027, 35% of the company's market value.
Based on these projections, shares are trading at a total shareholder yield of 16.7% for 2026 and a historical price-to-earnings (p/e) ratio of 11.9, although this does not account for long-term profit-generation potential, as highlighted by the group's forecast CSM. Legal & General is continuing its transition to a cash-generative, asset-light business. Investors should take note.
Rupert Hargreaves owns shares in Legal & General
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