Although the financials industry group has seen valuations of its constituents rise at a very fast pace in recent years, I believe there are still bargains to be had, with Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) being one of them.
Indeed, with the FTSE 100 trading on a price to earnings (P/E) ratio of 13.8 and the financials industry group having a P/E of 17.9, Legal & General stands out as an undervalued stock at current price levels.
It has a P/E of just 13.3, which is a discount of 3.6% to the FTSE 100 and a discount of just over 25% to its industry group.
Looking back at the last few years, Legal & General seems to have had a smoother ride than many of its industry group peers, with future growth prospects also appearing to be bright.
Therefore, such a wide discount seems unjustified. If shares were to trade on a smaller discount to the industry group, say a 10% discount, it would mean shares trading at around 250p, which is 21% higher than their current price.
Such a price would not be unreasonable, since it would still represent a sizeable discount versus the financials industry group and, as such, appears to be an achievable level over the medium to long term.
In addition, Legal & General continues to offer an above average yield of 4.4%. This is considerably higher than the FTSE 100 yield of 3.6% and even more generous than the financials industry group yield of 3.2%.
However, company management does not appear to be sacrificing the long term health and viability of the business in favour of providing shareholders with a short term income boost. Indeed, the payout ratio is only moderate at 59% and, therefore, seems to have scope to be increased.
Industry group peer Lloyds recently announced that it intends to pay out up to 70% of earnings as dividends by 2016. Such a payout ratio could put Legal & General on a yield of 5.3% at its current price level.
So, Legal & General offers the potential for significant capital gains over the medium to long term, as well as a generous yield which has the potential to increase should management become more generous with the payout ratio (which they have the scope to do).
However, is it good enough to retire on?
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