Legal & General Lifts Dividend 20% as Sales and Profits Grow

Legal & General Group Plc, the biggest manager of U.K. pension assets, raised its dividend 20 percent after sales, cash flow and operating profit grew on demand for retirement products in Britain.

The full-year payout will be 7.65 pence a share, up from 6.4 pence a share in 2011, the London-based insurer said today in a statement. That beat the 7.43 pence average estimate of 21 analysts, according to data compiled by Bloomberg. Operating profit climbed 3 percent to 1.1 billion pounds ($1.7 billion) in 2012, matching the average estimate of 14 analysts.

Legal & General is betting lower state retirement and welfare provisions will boost sales of pensions and income-protection policies in the U.K. even as the economy sits on the brink of a triple-dip recession. Differentiating itself from rivals Prudential Plc, which focuses on Asia, and Aviva Plc, which has European assets, Legal & General is seeking to tap the growing market for corporations offloading their pension liabilities in the U.K. and the U.S.

“L&G’s ability to turn earnings into cash and to upstream this cash was again demonstrated in these earnings,” Alan Devlin, a London-based analyst at Barclays Plc with a buy rating on the stock, wrote in a note to clients. The firm has “a virtuous cycle of cash generation driving dividend increases and mergers and acquisitions, which in turn drives future earnings growth.”

Cash Flow

The shares closed at 166 pence, up 2 percent, in London. They have gained 14 percent this year, giving the company a market value of 9.8 billion pounds.

The firm’s net cash position climbed 2 percent to 865 million pounds, covering its dividend 1.9 times, Chief Executive Officer Nigel Wilson said on a call with reporters. Legal and General isn’t sensitive to the low interest rates that have hurt other insurers, he said.

“We have very good visibility and certainty around a high-quality cash flow which underpins the dividend,” he said.

RSA Insurance Group Plc, the U.K.’s biggest non-life insurer by market value, cut its payout 33 percent last month, blaming a “prolonged low bond yield environment.” Aviva, a rival to Legal & General as the U.K.’s second-biggest insurer by market value, has a “very real possibility” of cutting its dividend when it reports earnings later this week, according to analysts at Sanford C. Bernstein & Co.

More Acquisitions

Legal & General is the “polar opposite” of Aviva, which is having to sell assets to boost its capital position after it was eroded by the European sovereign-debt crisis, Devlin said.

Sales of savings products rose 15 percent to 1.5 billion pounds, while individual annuities were 26 percent higher at 132 million pounds. Legal & General Investment Management’s assets rose 9 percent to 406 billion pounds in the year.

The insurer will target acquisitions in its existing areas of expertise, Wilson said on the call.

“We started with cash, delivering high quality cash with a high degree of certainty,” he said. “We moved to cash plus organic growth, which we’ve done in the last year in particular. For 2013, it’s cash plus organic growth plus bolt-on acquisitions.”