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With an eye on building wealth over the long term by compounding dividends, many people aim to make sure their retirement portfolio includes a good amount of income shares.
Here is one high-yield share that I think investors should consider now, for its future income-generating potential.
Well-known – but a weak performer
Over the past few years, Legal & General (LSE: LGEN) has been a disappointing share for many investors.
Across the past five years, the Legal & General share price has fallen 3%.
So what, you may ask. Is 3% such a big fall in the grand scheme of things?
Not necessarily, considered in isolation. But in the wider context of the FTSE 100 index rising 52% during that period, the performance of Legal & General (itself a member of that index) certainly looks disappointing.
Could there be value here?
That weak share price performance, along with buybacks, mean that the company now commands a market capitalisation of under £15bn.
That actually looks like an attractive valuation to me, which is why I think Legal & General merits consideration for a retirement portfolio.
Index-leading dividend yield
While the share price performance has been poor, the company has been pumping out dividends like nobody’s business.
In fact, the dividend yield of 8.3% is the most lucrative of any FTSE 100 share right now. Legal & General aims to keep growing its dividend per share annually, though of course shareholder payouts are never guaranteed for any share
Dividends do not necessarily make up for poor performance in other regards, I realise. But I think the historical share price performance is not necessarily indicative of the current strength of the business – or what may happen to the shares in years to come.
Legal & General is a large business with a sizeable long-term customer base. Some are customers for decades on end.
Utilising its strong brand and large customer base, the company has proven its ability to generate sizeable cash flows.
Serious cash generator
Take the first half of last year as an example. Profit before tax (using International Financial Reporting Standards) came in at £406m.
But profits do not always capture the full picture of a financial services provider’s health, as swings in valuation from a vast asset base can affect them.
So instead, we can look at capital generation as a different measure of performance. On what is known by the accounting profession as a ‘Solvency II’ basis of preparation, capital generation came in at £729m.
Bear in mind that that is for just six months — yet it already equates to some 5% of Legal & General’s current market capitalisation.
Looking to the future
I think the share looks like a possible bargain relative to its current price, so why has the share been performing weakly?
The planned sale of a large US business raises the risk of recurring revenues falling, albeit with the carrot of a nice pile of cash for selling it.
Another risk is the sort of financial market turbulence we have seen over the past year or so leading some risk-averse policyholders to change their financial planning. That could hurt revenues for Legal & General.
Still, given the income potential it could offer a retirement portfolio over the long run, I see Legal & General as a share for investors to consider.
