CTAs are almost max long in equities, have very limited room to buy: UBS
Investing.com -- UBS has downgraded Legal & General Group Plc (LON:LGEN) to “neutral” from “buy,” keeping its 12-month price target unchanged at 275p, in a note dated Tuesday.
The brokerage said the insurer’s valuation has now caught up with its estimates and that the capital returns on offer adequately offset risks rather than provide upside.
The analysts expect L&G to return £5.3 billion, equal to more than 35% of its market value, to shareholders over the next three years through dividends and buybacks.
That figure includes £1.25 billion of one-off returns from the sale of its U.S. business, non-core asset disposals and a reduced investment in new business.
Stripping out those exceptional items, the expected all-in yield of about 10% is not covered by earnings or capital generation in the near term. UBS forecasts payout ratios above 100% until 2027.
The report flagged risks tied to L&G’s high payout, its sensitivity to credit events and its relatively low excess yield compared with its historical average.
The solvency ratio is projected to fall 17 percentage points to 200% by 2027 as a result of capital returns and new business strain, while shareholders’ equity is forecast to decline by £0.7 billion in the same period.
UBS also cut its earnings estimates, citing continued negative investment variances of about £400 million annually.
Reported diluted EPS is forecast at 15.06p for 2025, down 36% from a prior estimate of 23.46p.
Despite the downgrade, UBS noted L&G will still deliver among the highest capital returns in the U.K. life sector. However, it said those returns are now fairly priced given the risks.