Are Legal & General shares gaslighting me?

I’ve fallen for the charms of Legal & General (LSE: LGEN) shares. I bought them in 2023 because they looked like a brilliant income play, with some growth prospects a little bit further down the line. Now I’m having doubts.

With a stunning dividend yield of 8.3%, it’s easy to see the appeal for income seekers. 

However, with the share price down 1.4% over the last year and a hefty 17% over five years, a significant chunk of those dividends have been wiped out by capital losses. Is this a case of one step forward, two steps back?

Is the FTSE 100 stock manipulating me?

One red flag is its price-to-earnings (P/E) ratio, which currently stands at a steep 32 following a recent drop in earnings. That’s an eyebrow-raising figure. Legal & General traded at just six times earnings when I bought it in 2023. It looked a bargain then. I’m not sure it was.

I’m concerned that I’ve been gaslighted into believing this is a bargain, only to end up overpaying for a business that is struggling to grow.

In December, the company released a positive set of results that offered some reassurance. The board said it was on track to hit its guidance for mid-single-digit growth in operating profit across full-year 2024.

With forecast cumulative Solvency II capital generation of £5bn-£6bn between 2025 and 2027, the dividend looked well funded.

Investors welcomed these figures, and the shares have rebounded 7% over the last three months, to be fair. However, the recovery has been hesitant.

The Legal & General share price got another lift on 7 February, when CEO António Simões announced the sale of the US protection business to Japanese peer Meiji Yasuda in a $2.3bn deal. 

Meiji Yasuda will take a 5% stake in Legal & General, which Simões hailed as a “transformative transaction”. Again, the shares jumped. Again, it didn’t last. They’ve returned to their customary slumbers.

Is the dividend alone enough?

There is a significant opportunity ahead. As interest rates fall, Legal & General’s high yield could become even more attractive. 

Lower rates tend to boost financial stocks by making their debt obligations more manageable and increasing the value of their investment portfolios. In theory, this should help the company regain momentum.

Yet there are two problems. First, UK interest rates have been cut three times with little impact on the share price.

Second, there’s no guarantee they will be cut much further, at least in the short run, as inflation picks up.

Legal & General might not be a classic value trap, but it isn’t a clear-cut income play either. The stock sits in a frustrating middle ground, offering high dividends but little in the way of capital appreciation. For investors comfortable with that trade-off, it may still be a worthy addition to a portfolio.

I love getting my dividends, and I won’t sell. More gaslighting by Legal & General? Possibly. But so far I’m up around 20%, despite minimal share price action. I’ll treat any growth as a bonus. And carry on questioning my sanity.

This post was originally published on Motley Fool