UBS warns Legal & General’s 9% dividend yield comes with a catch Proactive uses images sourced from Shutterstock
The bank cut its price target and slashed earnings forecasts, arguing L&G’s finances are weaker than they look compared to rival Aviva
A dividend yield approaching 10% sounds like a gift. UBS thinks it comes with strings attached.
The Swiss bank published a detailed analysis of Legal & General on Thursday, holding its Neutral rating on the stock while cutting its price target from 260p to 250p. More striking was the scale of the earnings downgrade: UBS reduced its profit forecasts for L&G by more than 20%, citing costs and accounting charges it expects to recur every year.
L&G’s shares currently trade at 241 pence, giving the stock the highest dividend yield in the FTSE 100. UBS forecasts that yield reaching 9.6% by 2028, well above the sector average of around 7.5%. The problem, the analysts argue, is that L&G is paying out more than it can afford.
What a payout ratio means
A payout ratio measures how much of a company’s earnings it returns to shareholders. A ratio above 100% means the company is paying out more than it earns, drawing down reserves to fund dividends. UBS forecasts L&G’s payout ratio will remain above 100% throughout its forecast period, which runs to 2030. Aviva PLC (LSE:AV.), by contrast, is expected to bring its payout ratio below 100% from 2028.
This matters because it has a direct effect on the balance sheet. L&G’s shareholder equity, essentially the net worth of the company, is forecast to fall from around £1.8 billion now to £1.5 billion by 2028. Aviva’s equity is expected to grow over the same period.
The solvency question
For insurance companies, the most important measure of financial health is the solvency ratio. Regulators require insurers to hold enough capital to absorb losses. L&G’s solvency ratio currently sits at 210%. UBS expects it to fall to around 180% by 2030 as dividend payments gradually erode the capital buffer.
Aviva, by contrast, is forecast to build its solvency ratio from 180% to 190% over the same period.
The gap between the two becomes stark under a stress scenario. UBS modelled a severe market shock similar to the dot-com crash of 1998 to 2002, assuming a 30% fall in equities, a 20% drop in property values, lower interest rates, and credit downgrades. Under those conditions, L&G’s solvency ratio would fall to 105%, below its own stated operating floor of 160%. Aviva would land at 160%, right at the bottom of its acceptable range.
The case for staying patient
UBS is not telling investors to sell. The dividend yield is real, and L&G’s underlying cash generation is expected to reach £1.4 billion a year by 2028. For investors who can tolerate a declining capital cushion and are not anticipating a serious market downturn, the income case holds. For those who want a cleaner balance sheet alongside their yield, UBS points firmly toward Aviva.