Gamble of the week: finance stock with bounce

By Tim Price Jul 18, 2008

Tim Price

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Given the fragile nature of the financial sector, any investment in it should be seen as something of a gamble. But not all financials are equal, and Legal and General is more equal than most.

The group is one of the largest financial services companies in Britain, with over five million customers across life assurance, pensions, investments and general insurance. It also manages more than £300bn globally and, along with Barclays Global Investors, is one of the largest providers of index-tracking investments, managing more than £214bn. That business is low margin but increasingly popular as both institutional and retail investors slowly wake up to the difficulties and expense of active investment management. The group is also diversified geographically, with operations in America, France, Germany and the Netherlands, unlike financial rivals who are solely exposed to a deteriorating British property market.

Legal and General Group (LGEN)

And European insurers probably have sufficient financial strength to avoid rights issues when they report second-quarter earnings, according to research from UBS analyst Marc Thiele: "Insurers went into the credit crunch with excess capital. Therefore we believe the results period could be a positive catalyst" for share prices.

Twenty brokers cover Legal & General. Seven rate it a 'buy', with eight as a 'hold' and five as an outright 'sell'. Historic metrics are probably less meaningful than normal given the generally gloomy future outlook for financial services firms. But Legal and General trades on a net dividend yield of over 6%, and on a forward p/e ratio of just seven.

Now that Santander has entered the fray with an agreed bid for Alliance & Leicester, the financial sector is likely to benefit from at least a short-term pick-up in sentiment, which up until now has been uniformly dreadful towards financials.

Legal & General is one of the sounder businesses in the market and a stock that has more potential than most for a bounce.

Recommendation: A CONTRARIAN BUY at 93.5p

• Tim Price is Director of Investment at PFP Wealth Management. He also edits The Price Report investment newsletter. 

Published in Tips & advice | More articles by Tim Price

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