Legal & General offices.

So much for gratitude. Legal & General reported a double-digit increase in pre-tax profits on Tuesday and raised its dividend. Shares fell by 5 per cent. Peer Standard Life also reported increased profits and a more generous payout. Its shares rose. Both should benefit from long-term trends such ageing populations — so why the divergence?

The ostensible difference is that UK-focused L&G has cut its free cash flow growth forecast for the year by around 2 percentage points (to 5 per cent). In the run-up to the Brexit vote L&G sensibly chose to hold more zero-yielding cash. So returns naturally dipped.

But lower cash generation at L&G could mean an unsustainable dividend. A high yield of about 7 per cent underscores this point. Lower economic growth after the UK referendum could also hit its annuity business, nearly half of operating profits. These funds have exposure to corporate credit and alternative assets such as infrastructure.

Standard Life, by contrast, looks more like an asset manager than a traditional insurer. Over nine tenths of revenues come from management fees. Given their recurring nature, that should make the dividend comparatively safe (its dividend yield stands at 5 per cent).

Standard Life’s income increases as inflows (and thus fees) go up. Worryingly, its flagship Global Absolute Return Strategies Fund (which accounts for 30 per cent of earnings according to RBC Capital Markets) had a rare net outflow in the second quarter. About £2bn of inflows from (generally longer-term) institutional investors enabled Standard Life to end the half with a small overall rise. Yet given intense competition, typical institutional money earns lower fees.

Over the past three years Standard Life shares have underperformed L&G’s by 26 percentage points. That seems excessive. If the former can boost inflows, it should outperform its rival in the year ahead.

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