MIDAS SHARE TIPS: Invest in Legal & General, insurer building up Oxford

Oxford University is nearly a thousand years old, dating back to 1096. Next year, when the Life and Mind Building opens on campus, it will be the largest building project ever undertaken by the university and its largest teaching and research facility.

The building, which will boost Oxford’s scientific capabilities, is being funded by Legal & General as part of a £4 billion partnership with the university, involving new housing for staff and students and upgraded facilities in the city.

Legal & General has long been considered rather dull, a United Kingdom insurance business whose tunes rise and fall with the wider economy. The truth is a bit more nuanced. Yes, L&G is one of the UK’s largest pension fund managers, but half of the assets in that pension division are international. The group has a growing business in the Americas and a branch dedicated to “alternative” assets, including the Oxford joint venture, retirement homes, clean energy, data centers, urban renewal and affordable housing.

Shares of the company are at £2.55 and should move higher as it benefits from changes in the pensions market and CEO Nigel Wilson pushes ahead with a robust five-year growth plan. Shareholders are also benefiting from generous dividend payments, with a forecast of 19.4 pence for the past year, which will see the stock return more than 7.5 percent.

L&G is expected to generate an operating profit of around £2.8 billion by 2022, of which almost 70 per cent will come from its pension business. Within that, the group is likely to generate around £600m from managing pensions, life insurance and other retail savings products here and in America. The remainder – more than £1.2bn – will come from managing occupational pension schemes.

The UK alone has nearly £2.5 trillion in so-called defined benefit obligations, with companies pledging to pay employees a fixed annual pension during their retirement. Very few of these schemes are still open to new members, but thousands have been set up over the decades and promises to staff must be kept.

In America the picture is similar and many companies here and there have come to the conclusion that the management of large pension plans is complex and time-consuming and is best performed by experts such as L&G. Over the years, the group has built a reputation in this area, acquiring hundreds of schemes with combined pension liabilities of almost £80 billion.

Now brokers expect a drastic change in activity, with more and more companies transferring their defined benefit plans to L&G.

The market is complicated. Highly trained actuaries have to calculate how long people are likely to live and how much money companies need to invest now to pay for pensions later. Bonds are considered the safest investments for these schemes, but when interest rates are low, returns are minimal. That means companies either have to put in more money to fund their schemes, or run short.

Numerous companies have gone down the path of deficit in recent years as interest rates have been at all-time lows. Now the tide is turning, increasing bond yields and strengthening schemes.

This offers L&G a great opportunity. Many companies are desperate to transfer their pension plans to large operators, but the sale has been held back because the group does not want to take on plans with large deficits. With the situation changing, business is forecast to pick up quickly, with experts predicting defined benefit sales to grow by more than 30 percent over the next four years. L&G is ideally placed to take advantage of this and similar trends are forecast in the US.

Companies are also increasingly inclined to pay off their pension obligations after the defined benefit debacle last fall, when schemes threatened to collapse following the ill-fated mini-Budget of Liz Truss and Kwasi Kwarteng.

Brokers expect this turn in the pensions market to lead to an improvement in L&G’s results, with profits rising from £2.8bn to £3.8bn between now and 2026. Dividends should rise in sync, at 20.3 pence for the current year, rising to 23.6 pence in four years.

But L&G is not just about pensions. The company has a thriving money management business for large institutions and individual depositors.

Wilson is justifiably proud of his group’s investment in a broad range of assets designed to combat climate change, increase the supply of affordable housing, improve inner cities and promote advancements in science and healthcare.

Initiatives include investments in Sheffield regeneration; help fund a science and technology center in Newcastle; achieving a net zero retirement village in Bedfordshire and building reasonably priced homes across the country.

Midas verdict: Legal & General has its origins in 1836, when Sergeant John Adams, a judge, founded a company to provide life insurance cover for lawyers. A year later, he and his co-founders decided to provide security to the public and Legal & General was born. The company has preserved vestiges of that past to this day, but with a market capitalization of over £15 billion, it is beyond the founders’ wildest dreams. There’s plenty more growth to come and the shares, at £2.55, should bring long-term rewards topped by generous dividends.

Traded on: Main market ticker: LGEN Contact: group.legalandgeneral.com or 0370 707 1399