INVESTMENT THESIS
Prudential Financial Inc. (NYSE: PRU) Analysts remain bullish on Prudential based on its strong ROE and attractive valuation. Analysts also believe that the company’s emphasis on faster-growing international life insurance markets positions it to deliver industry-leading returns. PRU has also grown assets under management, which generate higher year-over-year fee income. The company’s balance sheet is clean, and management consistently returns capital to shareholders through dividend hikes and share buybacks. The shares trade at a discount to peers and seem attractive given the company’s above-average dividend yield and ROE.
The coronavirus has had a negative effect on mortality rates, which has hurt PRU’s life insurance business. The virus has led to higher expenses and financial market turmoil, resulting in lower investment income. While the outlook for the remainder of 2020 is more muted than Analysts initially projected, the stock’s valuation is attractive and the overall business should continue to grow in 2021. PRU shares yield about 6.5%, compared to a median of 5.3% for peers.
The company intends to invest in higher-growth markets. During the third quarter, PRU divested Prudential of Korea and agreed to sell Prudential of Taiwan.
RECENT DEVELOPMENTS
The beta on PRU shares is 1.69. The increase reflected higher underwriting and investment income, offset by higher COVID-19 expenses. Including one-time items, the company reported GAAP net income of $1.49 billion or $3.70 per share, up from $1.42 billion or $3.44 per share in 3Q19.
Reflecting higher premiums earned, higher net investment income, and an increase in commissions and asset management fees. Operating ROE for the nine-month period was 10.1%, down from 12.5% in 2019.
EARNINGS & GROWTH ANALYSIS
To generate our insurance company earnings estimates, Analysts analyze ROE trends, rather than quarterly growth trends, which can be volatile. Over the long term, Prudential is delivering sustainable low double-digit ROE, much better than the 9% long-term median for peers.
Analysts like the company’s growth prospects (especially in higher-margin international markets), business mix, shareholder focus, and strong capital position. Despite market volatility and low interest rates, Analysts expect Prudential to continue to perform better than peers.
Reflecting the company’s higher 3Q earnings, increased premiums, and gains in investment income. Our estimate also reflects the impact of COVID-19 on mortality rates and expenses. Our EPS assumptions imply an ROE of 13.0% over the next two years — at the midpoint of management’s target range of 12.0%-14.0%. Our five-year earnings growth rate projection is 7%.
FINANCIAL STRENGTH & DIVIDEND
Long-term debt of $20.1 billion.
Like many companies, Prudential has temporarily suspended buybacks as a result of the pandemic.
MANAGEMENT & RISKS
Charles Lowrey has served as CEO since November 2018. Mr. Lowrey, formerly the COO of Prudential’s international business, also became chairman in April 2019.
Analysts note that some investors have been concerned about Prudential’s deployable capital, i.e., capital above and beyond the capital that must be reserved to pay claims. In particular, Prudential’s aggressive buyback and dividend policies may strain deployable capital. However, according to management, 60% of operating earnings will be available to boost deployable capital. Given the company’s strong ROE, Analysts believe that it has more than sufficient capital to grow the dividend.
Prudential investors also face risks related to uneven international growth and volatile equity markets. Lastly, the company faces economic risks from the coronavirus.
COMPANY DESCRIPTION
Prudential Financial Inc., based in New Jersey, is a leading diversified insurance company. The company operates through three subsidiaries, U.S. Retirement Solutions and Investment Management; U.S. Individual Life and Group Insurance; and International Insurance and Investments.
VALUATION
Compared to a group of life insurance peers, PRU also appears attractively valued based on long-term ROE and dividend yield.
On November 5, BUY-rated PRU closed at $65.37, up $2.28.
Source: Argus
