RE: Eggs in basket24 Aug 2023 17:35
Totalrisk, apologies, having reread what I posted earlier I fear it might have sounded patronising and that was not my intention.
However, for my own sake at least I thought I’d summarise my reasons for continuing to build my holding in LGEN. I have been buying steadily for a few years because I wanted to balance the hope factor elsewhere in my portfolio with a some cash generation prior to retirement. My funds portfolio have seen little or no growth in the last two years and I think that overall at the moment the risks are on the downside for the general market.
I have always been under the impression that well managed money should double every 10 years. Some investments will do better than that and others much worse, but on average that is respectable.
At the moment the LGEN dividend forecast for next year (20.64p) represents a 9.6% return on the current share price. The policy of growing the dividend by 5% a year for the next couple of years has been restated and is backed up by the £13.8bn deferred profits currently sitting in their balance sheet. Those are profits that have been booked on current contracts that for accounting rules need to be recognised in future periods. That is effectively the next 5 years profits which gives me a lot of confidence that the dividends will be paid. It is also more than the current market cap of £12.8bn by a whole bn. Normally, I would worry that a high divi might be unsustainable or that the market knows something important that I have overlooked but in this instance i think the sp has been driven by macro and wider market issues and trends rather than anything company specific. The profits are being driven by the bulk annuity market and these are generally once in a lifetime decisions, and not dependent on consumer whim or fashion. They report that they are writing a lot of new business at attractive margins that should ensure that the profits will be there to be paid out over the coming decades.
If the dividend grows at 5% a year for the next 5 years each share will throw off a total of 114p over that time. Assuming that it doesn’t grow at all over the following 5 years it will have generated 228p, which is more than double the current sp.
The average yield over the past decade is, if I recall correctly, circa 6.5% and at some point the market Will wake up to the value of these shares and the the yield will revert to the mean. On this basis the current sp should be over 300p.
However, I regard that as being a bit academic as I am buying to hold. The sp has a history of fluctuating and I regard the dips as buying opportunities.
The risk is that mortality rates begin to rise and that the annuities need to be paid out for longer. But any chance of a cure for cancer (hurrah) is likely to be offset by the declining efficacy of antibiotics (boo). But I am sure that the clever actuaries have factored all that into their pricing models.
GLA
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