Legal & General (LSE:LGEN) remains one of the most generous income payers among London's largest companies, and it is now pairing that Dividend with a steady programme of share cancellations. The insurer's headline Payout Ratio looks alarming at first sight, but the figure needs careful reading. Income investors must weigh a very high Yield against a dividend that is deliberately growing only slowly.

The income numbers

As of 7 October 2026, L&G's annual dividend stood at 21.79p per share, with the latest interim payment at 6.24p. That gives a trailing 12-month yield of 7.6% and an indicated yield of 7.5%, both well above what most UK blue chips offer. Dividend growth over the past year was 2.0%, which matches the group's stated policy rather than suggesting any loss of momentum.

The company's record is the other part of the attraction. L&G has paid dividends without interruption for 42 years and has raised them for five years in a row. The streak of increases is much shorter than the payment record, a reminder that an unbroken dividend is not the same thing as one that rises every year.

A yield above 7% is well above the FTSE 100 average, and that alone invites questions about sustainability. High yields can arise because a company pays out generously, or because the share price has been held back by doubts about future earnings. In L&G's case, both elements are in play: the dividend is large relative to the share price, while the group has to demonstrate that its core Earnings can keep pace with the payout.

Reading a payout ratio of 188.1%

The trailing payout ratio of 188.1% implies dividend cover of only about 0.5 times on statutory earnings. Taken at face value, that would suggest L&G is paying out almost twice what it earns, which no company can sustain indefinitely. For a life insurer, however, statutory profits can swing sharply because of the way Long-Term Assets and liabilities are valued, so the ratio tends to overstate the strain.

Management prefers to point to core operating earnings, and those are moving in the right direction. Half-year results published on 5 August showed core operating profit up 7% to £918m and core operating Earnings Per Share up 11% to 12.15p. The Interim Dividend of 6.24p was therefore covered almost twice by first-half core earnings, a far more comfortable picture than the statutory measure offers. Even so, the gap between the two measures is wide, and it is reasonable for shareholders to keep an eye on it.

Insurers hold large portfolios of investments against long-term promises to policyholders, and the accounting rules require many of those items to be marked to market each period. A fall in asset values or a change in interest rates can therefore depress statutory profit without affecting the cash that the Business actually generates in the year. Core operating profit is designed to exclude those swings, which is why it is the measure management uses when it sets dividend policy.

Buybacks add to the return

L&G has said it expects to lift the Dividend per share by 2% a year through to 2027, so the buyback is doing much of the work in growing Shareholder returns. At the half-year stage, around £750m of a £1.2bn programme for 2026 remained to be completed. A regulatory update in early October showed nearly 16 million shares repurchased between 28 September and 2 October at prices of roughly 284p to 300p, with the shares due to be cancelled.

Fewer shares in issue should make each future dividend payment less costly in aggregate. The mechanics are straightforward: when shares are cancelled, the same total dividend bill is shared among fewer holders, so a modest rise in the per-share payout does not require total spending to increase by the same amount. That is why LSE:LGEN can pursue a 2% annual dividend growth target while also lifting core earnings per share by a faster rate.

Capital and the pension market

The first-half results also carried some caution. UK pension buyout volumes came to about £2bn against roughly £3.3bn a year earlier amid tougher competition, and the group trimmed its forecast for the market's 2026 volumes to £50bn as some deals slip into 2027. The Solvency II ratio of 201% remained above the 160% to 190% target range, though it was somewhat lower than the level some had anticipated.

Pension risk transfer, in which an insurer takes over the pension obligations of a company scheme in return for a premium, is one of the main drivers of L&G's earnings growth. A slower year for deal volumes does not necessarily reduce profit, since it often reflects the timing of transactions rather than a loss of demand. It does, however, make the pace of new business a key variable for how quickly core earnings can grow.

The Solvency II ratio measures the Capital an insurer holds against the regulatory requirement. A figure of 201% means L&G holds roughly twice the minimum, and being above its own target range gives the board flexibility to return capital through Buybacks and dividends. If the ratio fell below the range, that flexibility could narrow, and the pace of returns would be reconsidered.

What to watch

The next major test is the full-year results, when investors will see whether L&G (LSE:LGEN) delivers on its upgraded guidance for core operating earnings per share growth above the top of its 6% to 9% target range. The pace of pension risk transfer deals will matter as well, given the slower first half and the competition in that market.

Investors will also look for any signal about capital returns beyond 2027, when the current 2% dividend growth commitment runs out. For anyone following LSE:LGEN, the central question is whether management extends the dividend growth policy, raises it or shifts towards a larger buyback, and how that choice sits alongside the Solvency II position and the core earnings trend.