Berenberg upgrades Legal & General to 'buy' as macro outlook improves

"At the start of 2023, the macroeconomic environment was not supportive for Legal & General shares," said analyst Thomas Bateman.

Investor concerns about credit risk and property valuations have hampered the stock since January 2022, but the tide is turning going into 2024, driven by a greater certainty about the interest-rate outlook.

Looking ahead, Bateman said: "Fears of credit risk and real estate valuations are subsiding, but the benefits of higher interest rates for L&G, such as strong annuity volumes, are here to stay, and we expect strong annuity volumes to drive a step-up in capital generation."

Meanwhile, he said that L&G offers one of the best dividend prospects for income investors, being the seventh-highest yielding stock on the FTSE 100, trading at an 8.5% 12-month forward dividend yield. A predicted "step-up" in capital generation growth could also drive higher dividends, Bateman said.

"While there is always risk associated with management changes, we believe there is scope for new CEO Antonio Simões [who officially joined last week] to increase the capital return to shareholders either via higher DPS growth in outer years or share buybacks."

Berenberg has hiked its target price from 258p to 289p for the stock, which was up 1.6% at 247.7p by 0843 GMT.