Legal & General Boosts Dividend as Profit Rises; Shares Jump

Legal & General Group Plc CEO Tim Breedon
Legal & General Group Plc Chief Executive Officer Tim Breedon said the firm has scope to lift its dividend by a similar level next year should market conditions allow it. Source: Legal & General via Bloomberg

Legal & General Group Plc, the fourth-biggest U.K. insurer by market value, boosted its dividend 35 percent as profit beat analysts’ estimates on growth in the U.S. and fees for investment-management products.

The shares jumped to the highest since 2008, the year the company cut its dividend amid the financial crisis. Operating profit rose 5 percent to 1.06 billion pounds ($1.7 billion) in the 12 months to Dec. 31, the London-based company said today, above the 1.05 billion-pound median estimate of 14 analysts in a Bloomberg survey. The insurer raised its full-year dividend to 6.4 pence a share, higher than 2007’s previous record payout.

The firm has scope to lift its dividend by a similar level next year should market conditions allow it, Chief Executive Officer Tim Breedon said on a call with reporters. Legal & General, the biggest investor in the U.K. stock market, has increased its fee-based savings business by a third and boosted profit at the division more than 10-fold in the last four years.

“This finally lays to rest the ghost of the 2008 dividend cut,” Eamonn Flanagan, a Liverpool, England-based analyst at Shore Capital Group Ltd. who recommends buying the stock, wrote in a note to clients today. “Legals reported a powerful set of 2011 results.”

The full-year dividend beat the analysts’ estimate of 5.94 pence and the 2007 payout of 5.97 pence. In 2008, the dividend was cut by a third. The current dividend payout is covered 2.25 times by net cash generation, and the firm intends to reduce this ratio to 2 times, Breedon said.

Shares Surge

The stock climbed as much as 5.5 percent, the steepest increase since Oct. 27, and was up 4.9 percent to 131.4 pence as of 9 a.m. in London trading, valuing the company at about 7.7 billion pounds.

Legal & General, founded as a life insurer in 1836, is betting that the aging British population’s demand for savings, pensions and annuities will increase as the government reduces state retirement provisions and companies close so-called final salary pension plans.

The focus on the savings business has helped rebalance the company away from annuities, which carry more investment risk. The company has tripled the amount of cash it generates since 2007 by cutting costs, reducing commissions paid to sales advisers and withdrawing money-losing products.

The shares are on pace to close at the highest level since April 2008. Legal & General also had the biggest advance in the pan-European Stoxx 600’s index of insurers.

Liability Management

Operating profit at the company’s investment-management division rose 14 percent to 234 million pounds as pension funds’ demand for liability-management products increased. Profit at the company’s international business grew 34 percent to 137 million pounds, driven by growth in the U.S.

Liability-management products are swaps and hedges that reduce the risks of volatile interest rates, equity markets and policy holders living longer than expected.

“Pension scheme de-risking was the big theme of 2011, which drove a lot of the growth in the numbers and profitability,” Breedon said.

Net income declined to 723 million pounds from 820 million pounds a year earlier as the company took losses from marking the value of some of its interest-rate hedges to market prices.

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