Legal & General shares (LON:LGEN) have been stair stepping higher this year, adding 12.45% YTD, and closing on a breach of the 260p resistance. LGEN dipped this morning out of the gate following a downgrade by UBS, even after demonstrating strong financial results for the first half of 2025.
The call was not entirely bearish in nature, with the downgrade to ‘Neutral' from ‘Buy' arriving with an unchanged price target of 275p. This suggests UBS believes the stock is approaching fair value, considering its current trajectory and future prospects. A substantial portion of expected gains have materialized, and the scope for upside from here according to the note is more limited than when earlier put in play.
Legal & General's half-year results, released on August 6, came in solid. Core operating profit increased by 6% to £895 million, landing at the upper end of the company's targeted growth range of 6%-9%. Earnings per share (EPS) also impressed, rising by 9% to 10.94p, exceeding analyst expectations of 10.50p. The interim dividend per share saw a 2% increase to 6.12p, aligning with company guidance. Despite these positive figures, the stock declined by over 3% to 253p after the announcement. Markets appeared to have already anticipated these gains, leading to a muted reaction to the earnings release.
Bull Case:
- Strong H1 2025 financial performance, with a 6% increase in core operating profit and a 9% rise in EPS, exceeding expectations.
- Attractive dividend yield of 8.74%, with the interim dividend increasing by 2%, appealing to income-focused investors.
- Strategic divestiture of Cala Homes for £1.35 billion, allowing for capital reallocation to core, potentially higher-growth business areas.
- Some analysts, such as Barclays, maintain a ‘Buy' rating, indicating continued confidence in the company's long-term value.
Bear Case:
- Recent downgrade from UBS to ‘Neutral' from ‘Buy', suggesting a more cautious outlook from a major analyst firm.
- The stock price is approaching the consensus price target, indicating that much of the potential upside may already be priced in.
- Significant year-to-date share price appreciation of 12.35% suggests the stock may be fully valued in the near term.
- Muted market reaction to strong earnings implies that positive results were already anticipated and factored into the existing price.
The combination of strong financial results, strategic divestitures, and varied analyst opinions creates a nuanced outlook for Legal & General. While the company has demonstrated its ability to generate profits and execute strategic initiatives, markets appear to be factoring these positives into the current share price.
The downgrade from UBS highlights the potential for limited growth in the near term, even with the attractive dividend yield.
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