For many years,
the stock performed well, but did not offer much capital appreciation.
The pandemic hasn’t helped, as stocks lost about 12% last year, including dividends, against an 18% return for the S&P 500 Index. The Newark, New Jersey-based financial services firm , has been rocked by ultra-low interest rates – which make it harder to earn decent returns on invested insurance premiums – and increased mortality.
But the market has changed its mind on
(ticker: PRU) in 2021, in part due to a rate hike. On top of that, Prudential, whose businesses include life insurance, variable annuities and asset management, is getting some credit for its more consistent profits in recent years. As of October 4, the stock has returned around 44% this year, easily beating the S&P 500’s 17% result. The stock, recently at $ 106 and is changing, returns 4.3%.
There is a strong argument that the stock has more potential as the company focuses on higher growth and less interest rate sensitive segments, like asset management.
“They do what they say, and they get less complicated,” says Stephanie Link, chief investment strategist at Hightower Advisors, referring in part to planned divestitures in the pension and annuity recordkeeping / administration business. company variables.
Add to that valuation an attractive market valuation, plans to return approximately $ 11 billion to shareholders through dividends and share buybacks through the end of 2023, and a cost reduction program that is ahead of the curve. on schedule to cut annual spending by $ 750 million by the end of 2023.
“When you look at what they sell and what they keep, it clearly seems to me that [Prudential] is expected to trade at a much higher multiple, ”Andrew Kligerman, analyst at
recount that of Barron. He holds the title Outperform, a cross-opinion of Street analysts.
Prudential recently recovered 8.1 times the 2022 profit estimate, compared to 7.6 times for insurance companies tracked by Kligerman.
Prudential is withdrawing from certain activities sensitive to fluctuations in interest rates, such as individual variable annuities with guaranteed lifetime benefits, and investing in more attractive segments such as asset management and regions with better growth prospects such as Africa and Latin America.
To this end, Prudential has made great strides. It announced in mid-September, for example, that it was selling 17% of the value of its individual annuity accounts for $ 2.2 billion to Fortitude Re, a Bermuda-based multi-line insurer.
Prudential also no longer sells annuities with a lifetime guarantee of a specified interest rate. The hedging of these products, sensitive to rate variations, was sometimes difficult and costly.
The individual annuities the company is now selling are index linked, “which is much easier to hedge,” and the “client assumes some of the market risk,” said Charlie Lowrey, CEO of Prudential since 2018. Barron.
In addition, investors do not give much credit to variable annuities, as evidenced by the low multiples attributed to these assets in various companies. So in theory, reducing this exposure could help Prudential’s valuation further.
Lowrey told analysts in February that Prudential wants individual annuities to be no more than 10% of earnings, down from around 20%, and double the percentage of faster growing companies such as asset management and emerging markets. , more than 30%.
Another large divestiture was announced in July, involving the company’s full-service pension business that involves record keeping and administration of entities such as 401 (k) plans. The deal is priced at $ 3.55 billion. “It was a very good company, but it’s not in a growing industry,” says Lowrey, adding that Prudential’s scale in that business was “reasonably small” compared to its larger competitors.
When it comes to buying companies, Prudential is now targeting small to medium sized transactions. Case in point: It also announced over the summer that it plans to buy Montana Capital Partners, a European-based asset manager with around $ 3 billion under management, to improve its alternative investment offerings. .
“The main point is that they can take [Montana Capital Partners] and maybe triple or quadruple assets in a short period of time, ”says Kligerman of Credit Suisse. “So it could be very accretive” to income.
The company’s global asset manager, known as PGIM, had about $ 1.5 trillion in assets under management as of June 30, down from $ 1.4 trillion a year earlier. This segment focuses on active management and not on indexation.
Some investors are concerned about how effectively Lowrey and his team will use the proceeds from the sale of various companies. One deal that has been questioned is the company’s acquisition in 2019 of Assurance IQ, an online seller of life, auto insurance and other financial products, for $ 2.35 billion. . The insurance, which has not been profitable, is part of Prudential’s efforts to reach more customers on more platforms.
“When you look at what they sell and what they keep, it clearly seems to me that [Prudential] is expected to trade at a significantly higher multiple.“
Lowrey said the focus now is on acquisitions that make sense for the company’s growth goals. As for Assurance, Lowrey maintains that digital product distribution is a key emerging trend for which Prudential is well positioned. Comparing Insurance to a start-up, he says that “we have invested more to make it grow faster”, confident in its long-term success.
Elsewhere in Prudential’s portfolio, Japan accounts for a significant portion of international earnings, in large part thanks to the company’s life insurance business there. But it faces challenges in Japan with an aging and declining population. Kligerman says part of the growth will depend on tapping markets outside of big cities like Tokyo and attracting younger customers.
“Does that mean they’re going to experience mid to high single digit growth?” No. But they can generate sub-single digit growth ”in Japan, he said.
That, along with other growth-oriented moves, would be enough to help increase the stock even further.
Write to Lawrence C. Strauss at [email protected]