Investment Column: L&G provides shelter from the storms

Ferrexpo; Capital & Counties Properties

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The Independent Online

Our view: Buy

Share price: 104.5p (-5.2p)

Legal & General's symbol is the multi-coloured brolly. It is aimed at customers but is just as appropriate for investors these days.

Yesterday, the FTSE 100-listed insurance company produced a pre-tax operating profit of £523m. That was slightly down on the £542m of a year earlier but still well ahead of the consensus forecast of £508m.

More importantly, however, was the 25 per cent rise in the dividend. The company had previously signalled its intent, but it's worth looking at the numbers behind it.

L&G intends its pay out to be two times covered by net cash – the amount thrown off by its book of existing business, plus profits generated by non-life business less capital needed to write new business.

That has risen rapidly, helpedpartly by a move towards less capital intensive products such as unit trusts instead of clunky old style life insurance vehicles.

Net cash was £302m back in 2009 (when the divvy was cut), £373m in 2010, and stands at £427m now. Combine that with a £4bn surplus over the minimum capital that regulators demand L&G holds and no wonder the City is calling for more.

Not us, though. L&G's exposure to the ongoing European debt crisis is really only at the macro level (there will be an impact on the UK and other economies). But it makes sense to hold a big buffer in turbulent times, in our view. Not doing that is what brought the banks down, so we support L&G's conservatism. This, in other words, is not a reason to sell.

Moreover, it has built a diversified UK savings business that is pushing into other markets. We made L&G our pick of the life sector last year, buying at 89.65p. Trading at a 21 per cent discount to L&G's embedded value (the value of all in force businesses) with a prospective yield of nearly 5 per cent, which will rise, the shares offer huge value. L&G also has none of the European exposure of Aviva, or Prudential's governance issues. In fact, we can hardly think of a good reason not to add to our holdings. Buy.


Our view: Buy

Share price: 429.3p (-1.4p)

That Ferrexpo's shares were broadly flat against the backdrop of a sharply lower stock market last night is testament to the strength of its half yearly results. The Ukrainian iron ore producer said earnings before interest, tax depreciation and amortisation had soared by a stellar 86 per cent to $401m, as revenues rose by more than 60 per cent to $855m.

Underpinning this is the recent surge in iron ore prices, which are up strongly thanks to healthy global demand. Indeed, the rise is such that earnings improved despite a fairly chunky rise in costs.

And while there is always a risk that commodity prices might fall (think of Chinese inflation and threat of tightening, which could hit industrial activity) it is worth nothing that Ferrexpo boasts a strong balance sheet, with a net cash position of $25m.

As Deutsche Bank noted, this is impressive, not least because the balance sheet was "36 per cent geared just two years ago". Adding to the attraction for us is that fact Ferrexpo's share price has been under pressure in recent weeks.

The stock market, it seems, was not anticipating the strong results, leading to a fall of more than 10 per cent over the 10 preceding days, a movement which presents a buying opportunity, in our view.

Capital & Counties Properties

Our view: Hold

Share price: 181.3p (-4.3p)

Location, location, location has always been the cliché when it comes to property, and for Capital & Counties it has turned out to be true. The property group concentrates on London, or more specifically the centre of the capital and the West End, areas that have been doing pretty well.

Yesterday's interim results were positive, with news that its net asset value for the first six months of 2011 had climbed to 154p, 6p higher than the start of the year.

Looking ahead, it seems likely that the group's re-development plans for Earls Court will be the focus for the stock in the near-future, after the planning application was submitted in June. This would definitely provide some upside. That said, the stock is up more than 20 per cent since the start of this year, meaning that a negative result on the application could trigger profit taking. We would therefore wait before buying. Hold.