2023-07-13 00:28:54 ET
Summary
- Prudential trades at 6.89 FWD P/E and 0.99 P/B.
- They are exploring potential growth through service optimization and acquisitions such as Deerpath Capital this quarter.
- Their dividend has now increased for a fifteenth straight year.
- Investment risks include stagnant growth and two consecutive quarters of a lower fee income from their US operations.
Prudential Financial (PRU) now sells at 6.89 FWD P/E and is down 7.16% over the last year. I have not entered a position. Prudential trails most of its peers, with only MetLife ( MET ) having larger losses since last year. Being an insurance and a retirement and investment planning company doesn't exactly scream excitement and growth potential. On the contrary, they're a very stable and predictable company now having increased their dividend in 15 straight years. Their industry and overall offerings along with their stagnant growth rates explain why it is an unpopular stock, but at current prices, I see the stock as a hold and maybe a small buy due to the discount relative to its sector.
PRU trades at a -24.12% discount relative to its sector's FWD P/Es median. As Benjamin Graham states in his book The Intelligent Investor , "the stock market is a popularity contest in the short term, but a very accurate weighing scale in the long term." Prudential is definitely not a popular stock due to the slow growth over the last few years, but the company seems to be trying to diversify their services in hopes of growth.
Buying Opportunity
As stated above, I see PRU as a hold and potentially a small buy due to their discount relative to their sector and strong dividend with history of growth now projected to be $5/share this year. Is there still value in buying Prudential? If Prudential were to return to the 2022 high of $121.38, it would result in a gain of over 32%.
According to Benjamin Graham's value investing strategy, in order to find value in common stocks, they must be selling at a low multiple in relation to earnings. For example, 15 is the maximum P/E ratio Graham would recommend buying. He also restricts the P/B ratio to 1.5. The only exception to a stock not satisfying both criteria is if the P/E multiplied by the P/B is less than 22.5.
Prudential satisfies both criteria by having a P/E of 6.89 and P/B of 0.99. Their FWD P/E is approximately 25% lower than the sector median according to Seeking Alpha .
Diversifying for Sustainable Growth Opportunities
There really isn't too much to be excited about in terms of growth for Prudential; however, they are looking at ways to diversify their offerings to increase growth. Highlighted in their first quarter earnings call, they agreed to acquire a majority interest in Deerpath Capital, record PRT sales along with double-digit growth in Brazil. They also improved their digital experience along with adapting to the current high interest rate environment. It's great to see constant improvements and adaptations, but none of these will drastically change the company's future growth prospects unless they continue with more acquisitions. Acquisitions always come with their own risks as well so we have yet to see how well the Deerpath Capital deal pans out and how long it'll take for Prudential to see real results.
Prudential: Transforming Our Business for Sustainable Growth (Prudential 1Q23 Earnings Presentation)
To that point, one avenue of potential growth and excitement is their balance sheet which shows plenty of dry powder in terms of liquid capital if they wanted to continue to invest in other revenue streams and growth. $4.6 Billion in highly liquid assets will give Prudential the freedom to make additional strategic investments or acquisitions. Their strong balance sheet should give shareholders confidence in their dividend payments and expectations of continual annual dividend growth.
Prudential: Navigating the Macro Environment with our Rock Solid Balance Sheet (Prudential's 1Q23 Earnings Presentation)
Their three main earnings drivers are PGIM, their US business and International business. PGIM accounts for $806M of earnings which makes up 12% of their total earnings. Their PGIM portion has now seen five straight quarters with net outflows of capital. Their US operations clock in at $2.65B of 41% of their total earnings. The US earnings are broken down into Net Fees (47%), Net Spreads (35%), and Underwriting (18%). In the first quarter, the underwriting services propped up another disappointing performance from fees and spreads on trades. Lastly, their international businesses make up the remaining 47% of earnings, roughly $3B. International sales actually grew by $65M or approximately 14% since 1Q22 showing some promise in their largest revenue stream with the highlights being strong performances in Japan and Brazil.
Prudential's International Businesses (Prudential's 1Q23 Earnings Presentation)
Dividend Growth
One main reason for holding and potentially buying Prudential is the dividend strong payment. They have now increased their dividend fifteen straight years even weathering the Covid pandemic with continued growth. The dividend is expected to increase to $5 this year which at current prices is a yield of 5.44%.
Prudential Maintaining Balanced and Disciplined Capital Deployment (Prudential 1Q23 Earnings Presentation)
The fifteen straight years of dividend growth are impressive, but you can clearly see some fatigue as the appreciation has dropped in the last few years which also may be a side-effect of Covid. While this might be a concern, they've been able to follow up single-digit dividend growth years with 25% and 20% increases the following year.
Prudential's Dividend History (Seeking Alpha)
Investment Risks
Prudential is a safe and stable company, but doesn't come risk-free. As mentioned before, the company has been pretty stagnant in terms of revenue growth which certainly caps the potential upside unless they were to make a major acquisition.
Prudential's Stagnant Revenue Growth (Seeking Alpha)
One other risk is a concerning trend of a decrease in Prudential's US fee income. In 4Q22, PRU saw a drop in fee income of $460 million versus $486 million in 4Q21. "This decrease reflects lower fee income, net of distribution expenses and other associated costs, driven by a reduction in account values, partially offset by higher net investment spread results" (Prudential 4Q22 earnings summary on Seeking Alpha). As shown below, the US fee income dropped again from $813M in 1Q22 to $760M in 1Q23. If this trend continues then Prudential will have a hard time overcoming the loss in revenue elsewhere.
Prudential's First Quarter 2023 Highlights (Prudential's 1Q23 Earnings Presentation)
The stock should be most viewed as a stable income stock with mild upside since it is trading at a 24% P/E discount relative to its peers. There is also some downside risk as the stock is trading around its 52-week average price with a low of $75.37, a potential downside of about -18%.
Overall Verdict: Hold, Income Stock
Prudential shows some promise as a value pick by having a P/E of 6.89 and P/B of 0.99. It also trades at a -24.12% discount relative to its sector's FWD P/Es median meaning any correction towards the sector P/E would ensure gains from our investment. Prudential is a safe stock with a great appreciating dividend with 15 straight annual increases. While there is some upside with Prudential, I have not entered into a position, and I'm calling PRU merely a hold unless the stock drops significantly closer to its 52-week lows to present enough buying upside.
For further details see:
Prudential Financial: Limited Upside Income Stock