Head to Head: Legal & General vs Standard Life

LONDON -- In this series, some of your favorite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.

Stepping into the ring today are the two oldest insurance companies in the FTSE 100: Legal & General (LSE: LGEN  ) , which was founded in 1836, and Standard Life (LSE: SL  ) , which was founded in 1825.

The shares of both companies have outperformed the FTSE 100 over the past year by a huge margin. The Footsie is up 10%, but Legal & General is up 44% and Standard Life 70%.

Let's take our seats at ringside.

Round 1: Earnings

  Legal & General Standard Life
Recent share price 147 pence 335 pence
Last year price-to-earnings (P/E) ratio 11.8 25.8
Current year forecast P/E 10.6 16.4
Four-year earnings per share (EPS) compound annual growth rate (CAGR) (%) 3 -12
Current year forecast EPS growth (%) 12 57
Operating margin (%) 17 20

Source: Digital Look. Winners in bold.

Legal & General edges the first round. Its P/E scores are particularly eye-catching relative to Standard Life's. I'll come back to the earnings growth numbers later.

Round 2: Dividends

  Legal & General Standard Life
Last year dividend yield (%) 4.4 4.1
Current year forecast dividend yield (%) 5.1 4.4
Four-year dividend CAGR (%) 2 5
Current year forecast dividend growth (%) 16 6
Forecast dividend cover 1.9 1.4

Source: Digital Look. Winners in bold.

Legal & General takes round two by a more comfortable margin, with Standard Life taking only one point for historic dividend growth.

Round 3: Balance sheet

  Legal & General Standard Life
Price-to-book (P/B) ratio 1.7 1.8
Regulatory capital surplus (billions of pounds) 3.8 3.0

Source: Digital Look. Winners in bold.

Legal & General powers further ahead in the final round, taking both points. At the end of the contest, Legal & General has won all three rounds. The overall points tally is Legal & General nine, and Standard Life three.

Post-match assessment
This was a resounding victory for Legal & General. Not only did the company score an impressive nine points out of 12, but those nine points included all five of the valuation-ratio points I use in these head-to-head contests: historic and forecast P/E, historic and forecast dividend yield, and P/B.

Insurers, like banks, have had a tough time since the credit crunch, with much restructuring of their businesses and dealing with new rules and regulations. As such, their statutory EPS numbers of the recent past aren't a great guide. The tremendous rises in their share prices over the past year suggest the market is now very much looking forwards rather than backwards.

In the case of forecast earnings, while Standard Life is expected to deliver a big increase on last year, it still leaves the company on a P/E above the market average and well above the sector average. Meanwhile, Legal & General's fairly modest forecast P/E looks quite attractive set against its forecast double-digit earnings growth.

In the case of dividends, Standard Life's historic growth numbers reflect the fact that it was able to grow its payout fairly steadily through the crisis years -- and a dividend increase of the same order is forecast for the current year. Meanwhile, Legal & General had to cut its dividend, but has since rapidly grown it back above the pre-crisis level -- and another substantial increase is forecast for this year. Yet still Legal & General's forecast yield is a good bit better than Standard Life's.

The numbers suggest, then, that Legal & General could be a reasonable investment at the current price, even though the shares have already risen a long way above the price they were at a year ago.

Not everyone would agree with that assessment. City wizard Neil Woodford, who famously got out of financials before the credit crunch, is still steering clear of banks and life insurers. Woodford has thrashed the market over the past 15 years, so there is much to learn from his views and approach to investing

If, like me, you're willing to learn from the best, you can help yourself to a free and exclusive Motley Fool report. In this report, you'll learn about Woodford's enormously successful strategy and eight of the blue-chip companies he currently favours. The report is available for a limited time only, but it can be in your inbox in seconds: simply click here.

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Related Tickers

10/21/2016 12:11 PM
LGEN $209.28 Down -1.62 -0.77%
Legal & General Gr… CAPS Rating: No stars
SL $336.12 Up +2.12 +0.63%
Standard Life CAPS Rating: No stars