I think Legal & General‘s (LSE:LGEN) one of the FTSE 100‘s best dividend shares to consider. It’s why I own the financial services giant in my own portfolio.
Shareholder payouts have risen in 11 of the last 12 years. The firm even kept dividends on hold during Covid-hit 2020, when scores of other UK shares were slashing, postponing or axing cash rewards.
The annual dividend’s tipped by brokers to rise again, to 21.32p, when Legal & General releases full-year financials next week (12 March). And City analysts are expecting it to continue rolling higher over the next two years too, as shown in the table below.
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 21.81p | 2% | 8.9% |
| 2026 | 22.3p | 2% | 9.1% |
Current forecasts leave Legal & General as the fourth-highest-yielder on the Footsie for this year.
However, it’s critical to remember that dividends are never guaranteed. And what’s more, broker forecasts can often overshoot or fall short of the target.
Taking this into account, how realistic are current dividend projections for Legal & General shares?
Dividend cover
The company has lifted dividends by 5% each year since it froze payouts in 2020. But last June it announced plans to reduce the rate of growth, to 2% between 2025 and 2027.
In exchange, Legal & General declared plans to ramp up share buybacks, a move it said would result in more cash being returned to shareholders.
Brokers’ dividend forecasts tally up with the company’s new dividend policy. But this doesn’t mean investors will end up enjoying such juicy payouts.
Dividends could suffer, for instance, if economic conditions worsen and demand for Legal & General’s products slump. With a large asset management division, profits are also vulnerable to a downturn on financial markets.
As an investor, I’m looking for potential dividends to be covered at least two times by expected earnings to provide protection aginst such problems. Any reading below this could theoretically leave payout forecasts in jeopardy.
Unfortunately Legal & General scores badly on this front, with coverage coming in at 1.1 times for both the next two years.
Balance sheet
However, it’s important to note that poor dividend cover is a hallmark of Legal & General shares. The increased 21.34p per share payment in 2023 actually towered above earnings of 7.35p.
The company’s strong cash flows have allowed it to keep paying a large and growing dividend in recent years. And its balance sheet remains rock solid, meaning that even if profits disappoint again, I’m confident it can meet its 2% dividend growth target over the near term.
Its Solvency II capital ratio was a market-leading 223% at the midpoint of 2024. This was more than double the level that regulators require.
Next week’s financial update should underline Legal & General’s robust capital base, one that will benefit from the company’s planned £1.8bn sale of its US protection business.
Looking good
While dividends are never a sure thing, I’m confident Legal & General will meet current dividend forecasts through to 2026. I’m also optimistic it can continue growing cash rewards over the long term as an increasing older population drives demand for retirement and wealth products.
This post was originally published on Motley Fool
