Forget 0.5% from a savings account. I’d go for the Legal & General share price and 7% yield

A decade after the financial crisis, the average easy-access savings account still plays a miserly 0.5%. That’s well below the current consumer price inflation rate of 2.2%, and the 4.25% yield you can get from the FTSE 100.

Legal matters

Everybody needs some money on instant access for emergencies, but you don’t want to leave large sums in cash for the long term, as its value will be eroded in real terms. Especially when you can get a forecast yield of an incredible 6.8% from a major blue-chip such as Legal & General Group(LSE: LGEN).

Most of you will know the name, and may even have some of its products. This is a huge business, with a current market capitalisation of just under £15bn, that sells general insurance, life cover, pensions, investments, ISAs and equity release lifetime mortgages. Founded in 1836, it has more than 10m customers around the world. This is no ‘here today, gone tomorrow’ operation.

Bulk buy

L&G is also moving into new areas, notably bulk annuities. This is where the insurer takes over the running of a company pension scheme on behalf of the employer, reducing its exposure to risk. In September, it completed a £4.4bn buy-in for the British Airways pension scheme. Covering nearly 22,000 pensioners, its the UK’s largest.

This is one of my favourite stocks on the FTSE 100. But even I have to admit that share price performance has been patchy of late. It’s down 11% over the past year, double the drop on the FTSE 100, which fell 5.3% over the same period. However, L&G has outperformed over five years, rising 13% against just 5% across the index.

Double blow

I had expected it to do better than that, especially after recently posting a 5% increase in operating profits to £909m for the first six months of this financial year, easily beating analyst forecasts of £875m. Others are mystified, too.

However, the Treasury has struck L&G with two blows in recent years. Former Chancellor George Osborne’s pension freedom reforms hit it hard because sales of annuities, one of its bread and butter products, plunged as a result. Now the Treasury is at it again, threatening more stringent regulation of lifetime mortgages, an otherwise promising growth area.

L&G also has a thriving investment management business, which is also exposed to stock market volatility as inflows fall when investors are feeling nervous.

Cash out

While the recent share price dip is disappointing, it does offer investors an excellent entry point, trading at just 8.1 times company earnings. To put this into perspective, the FTSE 100 currently trades at 15.78 times, so L&G looks comparatively cheap. There may be volatility ahead, but much of the uncertainty seems to be priced in. Especially with revenues forecast to rise 13.9% this year.

Forward earnings do look a little patchy, though. After five strong years of growth, they are forecast to drop 1% in 2018, then recover a little in 2019, rising 4%. By the end of next year, the yield is forecast to hit an incredibly generous 7.3%, with cover pretty solid at 1.8, which suggests this income payout is sustainable. In the longer run, L&G should thrash cash.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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