In reply to strictlybricks7 Jun 2024 13:20
“Has the underlying performance of LGEN become steadily weaker over the past nine years in a way that may be obvious to many but not to a simple soul like me?”
“Or is the market failing to give full recognition to the value of LGEN and their peers MNG & PHNX…?”
My view is that it's best to argue this based on fundamentals...
The current LGEN yield is 8%. This compares with the 10 year gilt rate of around 4.25%.
The 10 year gilt yield is important as it's considered the "risk free" return rate. The idea being that, as sovereign debt, you are guaranteed to get that rate or return. In principle, any investment you make that other than in that 10 year gilt should provide a risk premium to reward you for taking that risk. The typical risk premium for "non-growth" shares is viewed as 2%. This is for total return. If an investment is returning more than that then one or more of the following is true:
1. The company is paying out more money than it's earning. This isn't the case here as last year the company grew the "store of future profits" (the "CSM") by £1.2bn after drawing down from the CSM and paying out dividends.
2. The market doesn't have confidence that current performance can be maintained. This is certainly a risk, but in the medium term the annuity market will still be buoyant; the pensions buyout market is likely to only get larger; and as interest rates drop and the recession eases, more retail money will be pulled into investments. L&G has plenty of opportunity for non-UK growth.
3. The market perceives systemic risks that need to be priced in. The key ones here being that L&G is a large holder of bonds and that it's invested in commercial property. The commercial property risk is predicated by a belief that offices and retail will continue to struggle.
This, in my view, is where market confidence has been knocked and, in my view, is largely unfounded. The bond risk is largely mitigated by the bonds almost always being held to maturity and are largely gilts/treasuries. The commercial property risk is mitigated by the type of tenants that L&G is pulling in - local and central government departments; the BBC.
My view is that the market is substantially under valuing the property side of L&G. It'll exist and have value long after the annuities it is underwriting are satisfied and almost always pays an inflation-linked rate of return. L&G are big investors in build to rent; student accommodation and accommodation for the elderly - all of which only have upside demand. What I think is often missed is how inflation proof or linked most of the income streams are. Even pensions payments, more than 80% of which are a percentage of salary - so go up with wages.
But/and the Truss mini-budget and subsequent SVB collapse have dented confidence in the financial markets and bond holders in particular.
I also think that the accounting standards changes haven't helped, which came into effect in the throw
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