Everything Has Not Changed: Legal & General to pay shareholder dividend despite warnings

April 23, 2020

2 min read

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What's going on here?

On 3 April 2020 financial services giant Legal & General (L&G) stated that it still plans to pay out dividends of £750m to its shareholders. This is contrary to the action taken by many of Britain’s largest banks and insurers amidst COVID-19 with L&G described as an “outlier” in the sector.

What does this mean?

The warning about a nationwide recession from the Bank of England’s Prudential Regulation Authority has had a sizeable impact. Banks, such as Barclays and HSBC, suspended proposed dividends (distribution of company profits to shareholders and investors) the following day. Other major insurers including Direct Line, Hiscox and RSA shortly followed suit.

Despite L&G not announcing any changes to their payments, the insurer suffered a similar fate to its counterparts as its shares fell by almost 10%. It appears that investors were too quick to predict its strategy, particularly given that the regulator only stated that insurers should be “prudent and consistent with their risk appetite”. Additionally, whilst a few L&G staff members have been furloughed, it has stated that it is not applying for government support and these individuals remain on full pay.

What's the big picture effect?

Appearing to defy official guidance and continuing “business as usual” during a global pandemic has proved to be controversial for L&G. According to critics, postponing dividends and not paying cash bonuses to staff is a proactive means of saving capital to keep the company and economy afloat. These reactions are arguably at least in part derived from the memories of 2008/09. By ensuring that corporations have sufficient capital to operate (saving costs by not paying out), it minimises the risk that the government will have to bail out the banks for the second time in recent history.

L&G has also stated that a reason for its inaction is that its financial position “remains robust”. Car insurer Hastings has similarly defended its decision not to cancel dividends, stating that it did not offer any lines severely affected and that its “gross written premiums were stable”. Yet, L&G’s key life insurance competitor, Aviva, has suspended its dividends. Whilst life insurance has not had a direct hit as severe as other forms of insurance, merely weakened by slow growth in the economy, it raises questions about management decisions in the coronavirus pandemic. If L&G can effectively navigate the current climate, it shows its commitment to stakeholders and a potential to hinder its competitors, but ultimately at what risk?

To find out more about the impact of COVID-19 on dividend payments, check out our article on Gateley’s dividends plans here.

Report written by Katrina Hughes

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