PUK - Prudential: It's About China And Dividends

2023-12-07 16:22:20 ET

Summary

• PUK's Hong Kong business has benefited from strong Mainland Chinese Visitors demand, but its Mainland China joint venture CITIC Prudential Life is facing regulatory pressures.
• Prudential's consensus FY 2023-2024 dividend yields are below 2%, even though the company is committing to high-single digit percentage dividend growth in these years.
• A Hold rating is awarded to Prudential following an assessment of the company's Greater China business prospects and its dividend growth outlook.

Elevator Pitch

I assign a Hold investment rating to Prudential plc ( PUK ) stock. There is a sharp contrast in the performances of Prudential's Hong Kong and Mainland Chinese businesses, so the outlook for PUK's Greater China operations is mixed. Separately, Prudential plans to pay out higher dividends this year and next year, but the stock's dividend yield isn't sufficiently attractive.

Company Description

In its media releases , Prudential refers to itself as a provider of "life and health insurance and asset management" services boasting "dual primary listings on the Stock Exchange of Hong Kong [2378:HK] and the London Stock Exchange [PRU:LN]" and "a listing on the New York Stock Exchange in the form of American Depositary Receipts."

PUK's operating income contribution, its market share ranking (a check mark refers to a No.1 position) for life insurance and asset management (branded as Eastspring) businesses, and the insurance penetration rates for the various geographical markets are highlighted in the chart presented below.

Prudential Is Among The Leading Players In Specific Underpenetrated Insurance Markets

Prudential cited Swiss Re's July 2023 projections indicating that the total life insurance Gross Written Premium or GWP for the company's geographical markets is forecasted to grow from $0.7 trillion in 2022 to $1.6 trillion by 2033 in its August 2023 Corporate Strategy Update presentation .

PUK has set a target of expanding its New Business Profit or NBP by +15%-20% for the 2022-2027 time frame, and its ambitious goal is supported by its leadership in key geographical regions and the potential for an increase in insurance penetration rates for these markets.

Greater China Prospects Are Mixed

Greater China (Hong Kong and Mainland China) is a very important part of Prudential's business accounting for 42% of its NBP for the most recent fiscal year, as noted in the company's 2023 Annual General Meeting or AGM presentation .

Recent industry statistics and financial numbers suggest that the outlook for PUK's Greater China business is mixed.

At the end of the previous month, Hong Kong's Insurance Authority issued a press release disclosing the most recent numbers for the city's insurance market. New business premiums for Mainland Chinese visiting Hong Kong surged from $1 billion in the first nine months of 2022 to $46.8 billion for the 9M 2023 time period, and this is consistent with PUK's latest business performance.

Prudential's Annual Premium Equivalent or APE sales for its Hong Kong segment increased by +40% YoY to $4.4 billion in 9M 2023, which it attributed to "the continued demand from Chinese Mainland visitors" in its Q3 2023 business performance update press release . Notably, PUK's actual Mainland Chinese Visitors or MCV APE sales for 9M 2023 were roughly +30% better than what the company achieved in 9M 2022. At its earlier interim earnings call (source: S&P Capital IQ) in August this year, Prudential revealed that its Hong Kong business is "taking market share and regaining the leadership position in the Mainland Chinese visitors' segment."

On the flip side, Prudential's Mainland China business arm, CITIC Prudential Life (a 50-50 joint venture with Chinese conglomerate CITIC), saw its "APE sales" decrease "further in the third quarter (of 2023) when compared with the prior period" as highlighted in its most recent quarterly business performance update release. As Prudential's primary listings are in the UK and Hong Kong, the company only releases full financial statements on a semi-annual basis and it didn't disclose the actual APE sales generated by CITIC Prudential Life for Q3.

Regulatory headwinds are likely to be the main reason for the weakness associated with CITIC Prudential Life, or PUK's business operations in Mainland China. Insurance industry publication Asia Insurance Review published an article in late September this year noting that China's "National Administration of Financial Regulation (NAFR), plans to limit commission fees in bancassurance operations" which might "lead bancassurance fees (in Mainland China) to plunge by 50% or more." It is also worth noting that Fitch Ratings' recently issued 2024 outlook research article for Mainland China's life insurance market predicts that "regulatory tightening and product transition in the life sector will moderate growth" next year.

In a nutshell, the prospects for Prudential's Greater China business are murky. The company's Hong Kong operations are doing well thanks to growing demand from Mainland Chinese Visitors, but negative regulatory developments are hurting its Mainland China joint venture, CITIC Prudential Life.

Dividends Are Expected To Grow But Yields Are Unattractive

In the company's 1H 2023 results presentation slides , Prudential guided for a 7%-9% yearly dividend per share increase for both FY 2023 and FY 2024. The expectations of high single digit dividend growth appear to be decent at first glance, but the stock's dividend yield is unappealing. According to S&P Capital IQ's consensus data, Prudential's consensus forward FY 2023 and FY 2024 dividend yields are 1.80% and 1.96%, respectively. From my perspective, I will typically demand a dividend yield of 2.5%-3.0% for a stock to qualify as a dividend play.

Prudential's dividend growth for the near term isn't likely to be exciting, because the company needs to allocate more capital to investments in the foreseeable future. In October this year, Morgan Stanley ( MS ) organized an investor event for Prudential, and the takeaways from this conversation were detailed in a research report (not publicly available) titled "Fireside Chat With Management" published on October 6. Based on this early-October MS report, PUK "aims to grow the dividend in line with free cash generation growth which is greater than 10%" for the medium term after it concludes its "investment into capabilities in the near future." Prudential highlighted in its 1H 2023 earnings presentation that it has set aside a billion dollars for investments between 2023 and 2025.

The current consensus FY 2027 dividend yield for Prudential is 2.53% (Source: S&P Capital IQ ). This implies that Prudential isn't a good dividend play now, as the company is still in the phase of investing for growth. Therefore, it will take a few years before the company can witness dividend growth acceleration.

Closing Thoughts

Prudential isn't the high yield play that investors are looking for. It is encouraging to know that PUK is committing to growing dividends for FY 2023-2024, but Prudential is only expected to achieve double-digit dividend per share growth after 2025 when it completes its current $1 billion investment target. Also, the strength associated with PUK's Hong Kong operations is offset by the weakness relating to its Mainland China joint venture. As such, a Hold rating for PUK is fair.

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