With 1.1 trillion in assets under management, Prudential Financial (PRU) is one of the largest financial services companies in the world. Prudential is based in the United States, but has operations across the globe in Asia, Europe, Latin America, as well as the United States. Three divisions comprise the bulk of Prudential's revenues, International Insurance, U.S. Individual Life and Group Insurance and U.S. Retirement Solutions and Investment Management.
The International Insurance division is responsible for about 36% of Prudential's total revenue. Products provided are individual life insurance, fixed-benefit health insurance, and retirement planning services. Prudential operates a significant life insurance business in affluent areas of Japan and Korea through its Life Planner operation. Insurance aimed at the middle class in Japan is sold through Prudential's subsidiary Gibraltar Life using Life Advisor agents.
Prudential's U.S. Individual Life and Group Insurance division comprises about 11% of total revenues. The Individual Life unit and the Group Insurance unit comprise about 32% and 68% of the U.S. Individual Life and Group Insurance division's revenues respectively. The Individual Life unit underwrites individual insurance and the Group Insurance unit underwrites group disability, group life, and other associated insurance products through employee/member benefit plans. Prudential has been having some issues with its group disability business but we believe that Prudential is taking the appropriate steps to address these problems. Specifically, Prudential is increasing prices to rational pricing levels and enforcing strict claims review practices.
As the crown jewel of Prudential's business, the U.S. Retirement Solutions and Investment Management business brings in about 53% of Prudential's total revenues. The breakdown of this division's revenues are as follows; Retirement with 45% of division revenues, Individual Annuities with 34% of division revenues, and Asset Management with 11% of division revenues. We expect demographic trends to help this part of Prudential's business. With the aging of the U.S. population, there is an increasing need for retirement products such as individual annuities and retirement-related services, such as retirement planning and investment management of retirement assets. We believe that Prudential's individual annuities business will navigate the current low-interest rate environment with prudent changes to prices/benefits and with prudent management of its first-class brand/sales force. Also, an improving stock market/economy bodes well for Prudential's investment management business that earns fees based on the value of assets under management.
One aspect of Prudential's business that we like is Prudential's strong balance sheet which gives it a great degree of financial flexibility. Financial flexibility may allow Prudential to create shareholder value through acquisitions, share repurchases, debt reduction, and increased dividends. Prudential has many financial options and has a history of using its resources wisely to create value for shareholders. We believe that Prudential's record of value creation will continue in the future. Another aspect of Prudential's business that we like is that Prudential has a well recognized brand with strong market positions in its various business segments such as life insurance, individual annuities, and investment management services. We expect Prudential to have a bright future and apparently analysts agree as they estimate that Prudential will earn $7.79/share in 2013 and $8.69/share in 2014.
We believe that Prudential is a good buy for the following reasons:
- Prudential is selling at a cheap forward earnings multiple of 7.3 times 2013 projected earnings.
- Prudential has a PEG ratio of 0.58, a Price to Sales ratio of 0.32, and a Price to Book ratio of 0.69.
- Prudential has a solid balance sheet with a net cash position of $12.9 billion compared to a market capitalization of $26.5 billion.
- Prudential has an attractive dividend yield of 2.80%.
- S&P has a Buy rating on the stock (4 out of 5 stars) and a 12 month price target of $66.00/share which is 16.0% above today's price. Also, S&P believes that the fair value of shares is $70.40/share.
Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.