LONDON -- I believe shares in insurance giant Legal and General  are poised for further gains as earnings growth ratchets up, underpinning future dividend increases. Indeed, Morgan Stanley increased its price target for the company's stock to 184 pence just this week, presenting almost 10% upside from current prices.

Firm set to build on excellent 2012
Legal and General announced last month that profit before tax increased 11.1% in 2012 to 801 million pounds, driven by record sales of 2.1 billion pounds, itself a 16.7% increase from 2011 levels. Encouragingly, the firm saw levels of new business surge last year, pushed by strong individual annuity sales that leapt 27% and a 25% increase in protection revenues.

Barclays Capital notes that the company's ability to throw up oodles of cash could herald bubbly M&A activity in the future to bolster organic growth -- it estimates that Legal and General could potentially unleash up to 1 billion pounds for acquisitions, which could produce an extra 116 million pounds in post-tax earnings and cash.

City analysts expect earnings per share to rise 7% in 2013, to 15 pence, and advance a further 6% next year to 16 pence.


Legal and General currently trades on a P/E ratio of 11.4, and 10.7 for 2013 and 2014 respectively, providing a chunky discount to an average prospective earnings multiple of 12.7 for the listed life insurance sector. I believe that the firm's excellent growth potential makes it a shrewd buy at these levels, with its stellar dividend policy providing the icing on the cake.

A bumper dividend builder
Legal and General is a favored pick among investors seeking plump investment income, the firm having doubled its full-year dividend since it was forced to cut the full-year payment to 3.84 pence in 2009. Indeed, Legal and General continued to build the dividend even in times of recent earnings pressure in 2010 and 2011, and last year's 20% hike to 7.65 pence comfortably beat analyst expectations.

And brokers expect dividend increases to keep rolling into the medium term at least, with a total payment of 8.4 pence this year anticipated to rise to 9.3 pence next year. And these payments carry yields of 5% and 5.5%, some way north of the prospective 3.3% yield for the U.K.'s 100 largest-listed entities.

Sterling dividend cover helps give investors confidence that the firm can fulfil these payments -- coverage of 1.8 times and 1.7 times for 2013 and 2014 correspondingly is decent, if below the widely regarded security watermark of 2 times.

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The article Should You Buy Legal and General Today? originally appeared on Fool.com.

Royston does not own shares in Legal and General.  The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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