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Investing.com -- RBC Capital Markets has downgraded Legal & General Group Plc (LON:LGEN) to "underperform" from “sector perform,” citing worsening fundamentals in the U.K. pension risk transfer (PRT) market, softening demand, and tightening valuation metrics, in a note dated Tuesday.
The 12-month price target has been lowered to 220p from 245p, representing a potential downside from the current price of 260.20p=.
As the market leader in U.K. PRT with a 23% share, LGEN is most exposed to emerging headwinds.
RBC now forecasts LGEN’s U.K. PRT volumes at £49 billion over FY2024–28, falling short of its £50–65 billion target.
Margin compression is anticipated, driven by competitive pricing and subdued credit spreads, A-rated U.K. spreads sit at 75bps, well below the 121bps average seen from 2022–24.
Institutional Retirement earnings growth is projected at 4% over FY2023–28, below both the firm’s 5–7% target and the consensus estimate of 6.6%.
Core operating profit forecasts for FY2025–27 are 3-8% below Visible Alpha consensus, while Solvency II operational surplus generation is projected to be 6-10% below consensus despite a £1.2 billion uplift from the sale of the US Protection unit.
Dividend coverage has emerged as a key concern. Net surplus generation is forecast at £3.5 billion over FY2025–27, short of the £3.6 billion in expected dividends, resulting in average coverage of just 0.99x, well below the peer average of 1.66x. Dividend payout ratios over the same period are projected to exceed 100%, limiting flexibility for future growth in distributions.
Legal & General’s reliance on Asset Management (22% of operating profit) increases execution risk, especially amid weak investor sentiment and complexity in scaling global private markets.
RBC forecasts AM earnings at £545 million by FY2028, within but toward the lower end of management’s £500–600 million target range.
Valuation metrics have also deteriorated. The 12-month forward dividend yield has compressed to 8.6% (down 0.9ppts year-to-date), narrowing the spread to the 10-year gilt yield, now at 4.7%.
On a price-to-book versus return on equity basis, LGEN screens as more expensive than U.K. life peers.
While LGEN expects to distribute £6.9 billion to shareholders through a combination of dividends and share buybacks over FY2024–27, RBC flags that these returns rely heavily on balance sheet capital, not recurring surplus generation, making them less sustainable relative to peers.