Prudential's stock is an excellent combination of value and dividend growth stock.
Prudential's stock has plenty of room to move up.
Prudential continued to deliver large sums of cash back to shareholders by stock buyback and growing dividend payments.
Prudential Financial, Inc. (NYSE:PRU) stock is an excellent combination of value and dividend growth stock. Prudential is benefiting from growth of fees, especially in its Annuities and Asset Management businesses. Although PRU's stock has significantly outperformed the market since the beginning of 2013, with a gain of 66%, in my opinion, it still has plenty of room to move up. Prudential has compelling valuation metrics and strong earnings growth prospects; its EV/EBITDA ratio is the sixth lowest among all S&P 500 stocks. In addition, the company continued to deliver large sums of cash back to shareholders by stock buyback and growing dividend payments.
Prudential Financial, Inc. provides insurance, investment management, and other financial products and services to individual and institutional customers in the United States and internationally. Prudential is one of the world's largest financial services institutions. The company was founded in 1875 and is headquartered in Newark, New Jersey.
The table below presents the valuation metrics of PRU, the data were taken from Yahoo Finance and finviz.com.
Prudential's valuation metrics are excellent; the PEG ratio is very low at 0.95, and the Enterprise Value/EBITDA ratio is extremely low at 5.88, the sixth lowest among all S&P 500 stocks. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street", Mr. O'Shaughnessy demonstrates that 46 years back-testing, from 1963 to 2009, have shown that companies with the lowest EV/ EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/ EBITDA is a better way to assess value-that is, how cheap or expensive it is-than looking at the PE ratio alone. The EV/ EBITDA is neutral to a company's capital structure and capital expenditures. Stocks that have very high debt levels often have low PE ratios, but this does not necessarily mean that they are cheap in relation to other securities.
Latest Quarter Results
On August 06, Prudential Financial reported its second-quarter 2014 financial results, which beat EPS expectations by $0.14 (6.00%) and were in-line on revenues.
The company reported after-tax adjusted operating income for its Financial Services Businesses of $1.176 billion ($2.49 per Common share) for the second quarter of 2014, compared to $1.093 billion ($2.30 per Common share) for the year-ago quarter. Total revenue came in at $11.1 billion, down 5.2% year over year primarily due to lower premium, partly offset by higher policy charges and fee income, net investment income and asset management fees and commissions.
In the report, Chairman and Chief Executive Officer John Strangfeld said:
We are pleased to report strong results for the second quarter and first half of the year. Each of our operating divisions achieved higher earnings for the quarter than a year ago. We are benefiting from growth of fees, especially in our Annuities and Asset Management businesses, continued strong performance in our Retirement business, and the contribution of the individual life insurance business we acquired from The Hartford. The integration is progressing on schedule, and cost savings are emerging consistently with our expectations. Our international businesses are performing well, as they continue to focus on serving lifetime financial security needs of our clients. Several of our businesses also benefited from favorable claims experience and strong investment results, bolstering solid underlying performance.
Dividend and Share Repurchase
Prudential has been paying uninterrupted dividends since 2002. The forward annual dividend yield is at 2.41%, and the payout ratio is at 80%. The annual rate of dividend growth over the past three years was high at 14.6%, over the past five years was very high at 24.4%, and over the past ten years was also high at 13.2% . I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and PRU's performance has been impressive in this respect.
Source: Charles Schwab
Although the payout ratio is pretty high, the company generates lots of cash; its price-to free-cash-flow ratio is extremely low at 4.32. Therefore, there is a good chance that the company will continue to raise its dividend payment.
During the second quarter of 2014, the company acquired 3.0 million shares of its common stock at a total cost of $250 million, for an average price of $83.87 per share. From the commencement of repurchases in July 2011, through June 30, 2014, the company has acquired 47.2 million shares of its common stock at a total cost of $2.9 billion, for an average price of $61.46 per share.
Competitors and Group Comparison
A comparison of key fundamental data between Prudential and its main competitors is shown in the table below.
Prudential has the lowest PEG ratio and the lowest EV/EBITDA ratio among the stocks in the group. However, its debt-to-equity ratio is the highest together with MET.
The charts below give some technical analysis information.
The PRU stock price is equal to its 20-day simple moving average, 0.94% below its 50-day simple moving average, and 3.00% above its 200-day simple moving average. That indicate a trading range.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.01 and descending, which is a bearish signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 53.38, which do not indicate overbought or oversold conditions.
Many analysts are covering the stock and most of them recommend it. Among the twenty analysts, six rate it as a Strong Buy, ten rate it as a Buy, and four analysts rate it as a Hold.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering PRU stock there are only three analysts who have the four or five star rating, all of them recommend the stock.
According to the company, it is benefiting from growth of fees, especially in its Annuities and Asset Management businesses, continued strong performance in its Retirement business, and the contribution of the individual life insurance business it acquired from The Hartford:
- Individual Annuities account values $159.5 billion at June 30, up 13% from a year earlier.
- Retirement account values $330.5 billion at June 30, up 10% from a year earlier.
- Asset Management institutional and retail net flows, excluding money market, total $3.4 billion; institutional and retail assets under management $547.1 billion at June 30, up 16% from a year earlier; total segment assets under management $921.5 billion at June 30, up 12% from a year earlier.
Prudential has been able to achieve Risk Based Capital ratio and Solvency Margin ratio well above its targets.
Source: Q2'14 Earnings Conference Call Presentation
Prudential has been able to show significant earnings per share surprise in three of the last four quarters, as shown in the table below.
Since the company has succeeded to beat analysts' expectations in three of the last four quarters, there is a good chance, in my opinion, that Prudential will continue to surprise by reporting better than estimated results also in the future.
PRU's stock has underperformed the market this year, but in 2013, it was a big gainer. Since the start of the year, PRU's stock is down 4.1%, while the S&P 500 index has risen 5.8%, and the Nasdaq Composite Index has increased 6.6%. However, since the beginning of 2013, PRU's stock has gained 65.9%, while the S&P 500 index has increased 37.1%, and the Nasdaq Composite Index has risen 47.5%. Nevertheless, considering its compelling valuation metrics and strong earnings growth prospects, the stock, in my opinion, is still cheap.
Prudential Financial, the second largest U.S. life insurer, will continue to benefit from growth of fees, especially in its Annuities and Asset Management businesses. Prudential has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 0.95, and the EV/EBITDA ratio is extremely low at 5.88, the sixth lowest among all S&P 500 stocks. Moreover, PRU's stock is trading below book value; its price-to-book-value ratio is at 0.98. In addition, Prudential returns value to its shareholders by stock buyback and increasing dividend payments. All these factors bring me to the conclusion that PRU stock is a smart long-term investment. Furthermore, the rich growing dividend represents a gratifying income.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PRU over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.