Monday, 20 May 2019

Prudential Financial: A Prudent Investment – Seeking Alpha

Prudential (PRU) is an international company with operations in the United States, Asia, Europe, and Latin America. They offer a variety of products and services to their customers, including life insurance, annuities, retirement-related services, mutual funds, and investment management.

The company operates through 5 divisions:

Division Description
PGIM Division Provides asset management services.

U.S. Workplace Solutions

Retirement segment: Provides retirement investment and income products and services; Group Insurance segment: Provides insurance products mainly in the US to institutional clients.

U.S. Individual Solutions

Individual Annuities segment: Develops and distributes individual variable and fixed annuity products

Individual Life segment: Offers insurance products to US individual clients.

International Insurance Division International Insurance segment: develops and distributes life insurance, retirement products, and certain accident and health products internationally.
Corporate & Other Operations Includes corporate items and initiatives that are not allocated to business segments and businesses that have been or will be divested or placed in run-off.

Source: Self-made table based on company data and 2019 financial outlook.

Investment thesis – Strong fundamentals and a long history

PRU has some strong fundamentals and even though the 4th quarter of 2018 affected the company results, they still managed to deliver some solid results. In 2018 alone, PRU distributed $3.0 billion to shareholders through dividends and share repurchases. Considering their history, I expect them to continue delivering high shareholder returns.

For 2019, for example, they have a share repurchase program for $2 billion and expect an adjusted ROE around 12% and 13%.

Some key financial metrics:

Metric Result
5-year EPS CAGR 11%
5-year Average Adjusted Operating ROE 14.1% (2018: 12.7%)
Assets under Management $1,2 trillion
5-year Dividend CAGR 16%
Credit ratings S&P: AA-, Moody’s: A1, Fitch: AA-

Source: Self-made table based on company data

As you can see, PRU is in a financially strong position and this is reflected in the credit ratings from the various rating agencies.

Looking ahead, longer life expectancies, the cost of higher education, economic worries and the changing nature of employment will present opportunities for PRU. To tap into these new opportunities, PRU in 2018 launched a campaign called “The State of US” and through “LINK” they can connect the needs of customers to PRU’s services and products.

Also, for PGIM, growth is expected as well. During an interview in February 2019 president and CEO of PGIM David Hunt mentioned that it has several deals in the making for M&As during 2019.

For the international division, PRU had an unexpected benefit for the Brexit crisis, as PRU concluded about $2.6 billion worth of retirement contracts.

Current valuation – Trading below its 7-year average P/E ratio

Currently, the share trades at a price of around $102 per share (25-04-2019) with an EPS expectation for 2019 between $12.75 and $13.00 (Source). At the current share price and last year’s earnings per share ($11.69), PRU currently trades at a P/E ratio of 8.72. However, for this year, they expect the earnings per share to be at least $12.75. This will result that the share currently trades at a P/E ratio of 8.72. Just below their seven-year average of 9.3. At this valuation and the outlook for this company, it is well worth an investment consideration.

Source: Self-made table based on company data

When we compare PRU’s P/E ratio (TTM) to some of its competitors, we can see that it is a bit more expensive than some of its competitors. This might warrant further research into for example MetLife (MET).

Source: YCharts

Dividends – The dividends are safe

PRU has a capital management philosophy of increasing shareholder distributions as their business grows. During 2018, PRU returned capital to shareholders amounting to more than $3 billion, split between dividends and share repurchases. For 2019, they will pay out a dividend of $4.00 per share, an increase of 11% compared to a $3.60 dividend payout during 2018. At $4.00 per share and a share price of $102, the current yield is 3.92% with a payout ratio of 31.4% (EPS estimate 2019). With this very low payout ratio, the dividend should be maintainable for the foreseeable future.

Source: YCharts

Key risks for PRU – Interest rates and economic downturn

As PRU is a financial services company, interest rates are a key driver of PRU’s results of operations and financial condition. As interest rates rise, PRU’s reinvestment yield may approach or exceed the overall portfolio yield. Conversely, if interest rates were to decline, reinvestment yield may fall below PRU’s overall portfolio yield, resulting in an unfavorable impact to earnings. In the recent period, we saw that the Fed increased its interest rates as the economy in the U.S. strengthened.

Source: FRED

Looking ahead, it is hard to say whether the Fed will continue to raise its interest rates or that it will lower them, as it is largely dependent on the status of the economy.


PRU is a very healthy company looking at its financials. With a 5-year EPS CAGR of 11% and a 5-year dividend growth rate of 16%. As it is currently trading at a P/E ratio of 8.72, it is an attractive opportunity worth considering buying.

As for its dividend, this should be safe for the foreseeable future with a payout ratio of only 31.4% and a current yield of 3.9%. The return to shareholders is also supported with an announced share repurchase program of $2 billion during 2019.

I also believe that PRU will continue to see earnings growth as market demand for the products and services will continue to grow.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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