Legal & General Shares (LGEN) Downgraded To ‘Underperform’, Analyst Cites Margin Pressures

Legal & General's share price (LON:LGEN) is back with the bulls today, up 0.94% in the morning session, after pulling back 2.2% on Tuesday.

Potential headwinds may be on the horizon however, as RBC Capital Markets downgraded the stock to ‘Underperform' from ‘Sector Perform,' significantly lowering its price target.

The move reflects growing concerns about the insurer's profitability and competitive positioning in the UK pension risk transfer (PRT) market.

Alongside the downgrade in rating, the firm cut their price target on LGEN to 220p, a big move considering their previous target of 245p. This revised target suggests a potential downside for investors of more than 15% from the current price action, and would have to see various levels of resistance broken along the way.

The downgrade highlights RBC's concerns about intensifying competitive pressures and softening demand within the UK PRT market. These factors are expected to negatively impact Legal & General's margins and overall volume.

RBC's analysts are now projecting Legal & General's earnings and capital generation for fiscal years 2025-2027 to be 6% and 9% below consensus, respectively. This divergence from market expectations underscores the severity of the challenges the company is anticipated to face.

A key concern highlighted by RBC is Legal & General's dividend coverage ratio, which is projected to be less than 1x over the same period, compared to a peer average of 1.66x. This situation is expected to limit the company's scope for dividend per share (DPS) growth beyond FY27.

Despite the negative sentiment from RBC, Legal & General's stock has been building steadily this year, adding 11% to trade near 52 week highs.

The consensus price target from other analysts remains higher than RBC's, sitting at 262p, demonstrates the gulf that exists between the bulls and bears on this one.

While RBC's downgrade provides some fuel for the bears, it's worth considering that Legal & General possesses significant strengths and potential avenues for growth. The company's established position in the UK market, coupled with its diversification across various financial services, could well provide some resilience against short-term headwinds.