4.9% Yielding Prudential Is Still A Buffett Style 'Fat Pitch'

Summary

• Today we wanted to point out an example of a wonderful company at a still wonderful price, Prudential Financial.
• After a 152% rally that has put even the tech-heavy Nasdaq to shame, Prudential is still potentially an anti-bubble high-yield blue chip.
• Prudential is still 28% undervalued and yielding a very safe 4.9%, more than three times the S&P 500.
• Looking for more investing ideas like this one? Get them exclusively at iREIT on Alpha. Learn More »

Photo by DustyPixel/E+ via Getty Images

This article was coproduced with Dividend Sensei.

Wait for a fat pitch and then swing for the fences." - Warren Buffett

Warren Buffett is one of the greatest investors in history, and just like most of the other wealth-compounding legends, the "secret" to getting rich on Wall Street is no secret at all.

Greatest Investors In History And The Legends Of Financial Science

Name	Returns	Time Horizon
Jim Simmons (Co-Founder Renaissance Technologies)	71.8% CAGR	1994 to 2014 (best investing record ever recorded)
Joel Greenblatt	40% CAGR	21 years at Gotham Capital
Peter Lynch	29.2% CAGR at Fidelity's Magellan Fund	1977 to 1990 (13 years)
Bill Miller (Legg Mason Value Trust 1990 to 2006)	22.8% CAGR and beat the S&P 500 for 15 consecutive years	16 years
Warren Buffett	20.8% CAGR at Berkshire	55 Years
Benjamin Graham	20% CAGR vs 12% S&P 500	1934 to 1956 (22 years)
Edward Thorp (invented card counting)	20+% CAGR	over 30 years
John Templeton	300% from 1939 to 1943, 15.8% CAGR from 1954 to 1992	38 years
Carl Icahn	14.6% CAGR vs 5.6% S&P 500	2001 to 2016 (15 Years)
David Swenson	13.9% CAGR at Yale's Endowment (includes bonds and alternative assets) vs 10.7% S&P 500	30 years

Click to enlarge

Buying quality companies at bargain prices is the secret to making lots of money." - Joel Greenblatt

Today we wanted to point out an example of a wonderful company at a still wonderful price, Prudential Financial (NYSE:PRU).

• Prudential Financial: Own A Piece Of This 'Blue-Chip' Rock That Yields 7%

Back in June 2020, we recommended this anti-bubble Buffett-style fat pitch chip and the results have been impressive.

Recommending PRU at about 5x earnings a very safe 7% yield, was a very high-probability/low-risk decision. One that has paid off handsomely.

Back in March Prudential hit a PE of just 3, pricing in -11% CAGR forever according to the Graham/Dodd fair value formula.

In other words, according to the father of modern securities analysis and valuation (and Buffett's mentor and also one of the greatest investors in history), Prudential in March could have grown earnings at -11% forever. And investors would still have made historical market returns of about 7% annually over time.

Prudential even in the darkest days of the pandemic, and the worst recession in 75 years, was never expected to grow at zero, much less negative rates.

Back in June, when PRU was about 5x earnings, it was still priced for -6% growth, while analysts expected about 8%.

What about today? After a 152% rally that has put even the tech-heavy Nasdaq to shame, Prudential is still potentially an anti-bubble high-yield blue chip.

(Source: FactSet Research Terminal)

At 8x forward earnings, PRU is priced for -1% permanent growth. In other words, PRU is still one of the highest quality and best Buffett-style "fat pitches" on Wall Street.

So let's take a look at the three reasons why we're still recommending and buying Prudential, and you might want to consider jumping in.

Reason 1: A Wonderful Company

The Dividend Kings overall quality scores factor in 138 fundamental metrics covering:

• Dividend safety

• Balance sheet strength

• Short and long-term bankruptcy risk

• Accounting and corporate fraud risk

• Profitability and business model

• Long-term sustainability (ESG scores and trends from MSCI, Morningstar, and Reuters/Refinitiv)

• Management quality

• Dividend friendly corporate culture/income dependability

• Long-term total returns (a Ben Graham sign of quality)

Dividend Safety

Rating	Dividend Kings Safety Score (73 Safety Metric Model)	Approximate Dividend Cut Risk (Average Recession)	Approximate Dividend Cut Risk In Pandemic Level Recession
1 (very unsafe)	0% to 20%	over 4%	16+%
2 (unsafe average)	21% to 40%	over 2%	8% to 16%
3 (average)	41% to 60%	2%	4% to 8%
4 (SAFE)	61% to 80%	1%	2% to 4%
5 (very safe)	81% to 100%	0.5%	1% to 2%
PRU	93%	0.5%	1.4%

Click to enlarge

Source: Dividend Kings

Long-Term Dependability

Company	DK Long-Term Dependability Score	Interpretation	Points
S&P 500/Industry Average	58%	Average Dependability	2
Non-Dependable Companies	31% or below	Poor Dependability	1
Relatively Dependable Companies	32% to 70%	Below to Above-Average Dependability	2
Very Dependable Companies	71% to 80%	Very Dependable	3
Exceptionally Dependable Companies	81% or higher	Exceptional Dependability	4
PRU	69%	Above-Average Dependability	2

Click to enlarge

Source: Dividend Kings

Overall Quality

PRU	Final Score	Rating
Safety	93%	5
Business Model	60%	2
Dependability	69%	2
Total	79%	9 (Blue-Chip)

Click to enlarge

Prudential Is the 174th Highest Quality Master List Company (Out of 492) = 35th Percentile.

(Source: DK Safety & Quality Tool) updated at the end of each day, sorted by overall quality score

PRU's 79% quality score means it's similar in quality to such 9/10 blue-chips, 10/12 SWANs, 11/12 Super SWANs, and 12/12 Ultra SWANs as

• Apple

• Texas Instruments

• Brookfield Asset Management

• Lockheed Martin

• Verizon

• AbbVie - dividend aristocrat

• British American Tobacco - global aristocrat

• National Fuel Gas - dividend king

• MDU Resources - dividend champion

• Philip Morris International

All told, our quality score includes 138 fundamental metrics pertaining to dividend safety, long-term dependability, and total returns. Every metric was selected based on:

• Decades of empirical data

• The experience of the greatest investors in history

• Eight rating agencies

• And what blue-chip economists and analyst firms consider most closely correlated to a company's long-term success.

What makes Prudential such a dependable dividend blue chip?

Since our last article, PRU raised its dividend for the 12th consecutive year.

(Source: Justin Law)

Twelve years is one of the statistically significant dividend streak cutoffs because relatively few companies with 12-year-plus streaks cut during the pandemic, the worst recession in 75 years.

Combined with a modest improvement in PRU's balance sheet in the last quarter this is why the dividend safety has improved into the 90s.

PRU's dependability continues to increase slowly but steadily.

It cut the dividend severely during the Financial Crisis because it had exposure to risky credit default swaps.

Today PRU's balance sheet is a fortress as confirmed by no less than 4 rating agencies.

• S&P rating: A stable outlook = 0.66% 30-year default/bankruptcy risk

• Fitch: A stable outlook = 0.66% 30-year default/bankruptcy risk

• Moody's: A3 (A- equivalent) stable outlook = 2.5% 30-year default/bankruptcy risk

• AM Best: a1 stable outlook = 2.5% 30-year default/bankruptcy risk

(Source: AM Best)

Credit and financial strength ratings have a 99% correlation because they are based on over 100 years of default data.

• Risk algorithms have been perfected over decades

(Source: Investor presentation)

PRU's risk-based capital ratio is over 375% vs. 200% regulatory minimum. It has $5.6 billion in low-cost liquidity right now. That's more than its annual earnings. Access to a mountain of money in case anything goes wrong, such as the pandemic.

All four rating agencies consider Prudential to be a very strong insurance company with a conservative balance sheet, well positioned to ride out even the worst recession in 75 years.

How strong is Prudential's financial position right now?

We expect to deliver on our cost savings program and to reallocate $5 billion to $10 billion in capital over the next three years, as we pivot towards higher growth and less market-sensitive businesses.

In parallel to this capital reallocation, we anticipate returning $10 billion of capital to shareholders over the next three years. This includes dividends as well as share repurchases that are returning -- that are resuming in the first quarter, under our new $1.5 billion authorization." - CEO, Q4 conference call (emphasis added)

The company has resumed buying back its highly undervalued shares, and it hiked its dividend 5% for 2021. That's after hiking 10% in early 2020, just as the pandemic was starting.

• S&P 500 dividends fell 1% in 2020, Prudential's kept rising

Prudential Consensus Dividend Forecast

Year	Consensus Dividend	Yield On Current Cost
2020	$4.40	4.7%
2021	$4.60	4.9%
2022	$4.94	5.3%
2023	$5.49	5.9%
Annual Growth Consensus	7.66%

Click to enlarge

(Source: FactSet Research Terminal)

Analysts expect Prudential to continue growing the dividend steadily, achieving a 14-year growth streak by 2023.

Prudential Payout Ratio/Debt Repayment/Buyback Potential Consensus Forecast

Year	Dividend Consensus	EPS/Share Consensus	Payout Ratio	Retained Earnings	Buyback Potential	Debt Repayment Potential
2020	$4.40	$10.21	43.1%	$2,301	6.3%	17.7%
2021	$4.60	$11.55	39.8%	$2,752	7.5%	21.1%
2022	$4.94	$12.77	38.7%	$3,101	8.4%	23.8%
2023	$5.49	$13.68	40.1%	$3,243	8.8%	24.8%
Total 2021 Through 2023	$15.03	$38.00	39.6%	$9,096	24.7%	69.7%

Click to enlarge

(Source: FactSet Research Terminal)

Analysts expect PRU to payout about 40% of earnings as dividends vs a 50% safety guideline for this industry.

• 2020 was the worst economy in 75 years

• interest rates fell to 0.32% at their March intra-day lows

• Prudential's payout ratio peaked at 44%, still below the safety guideline historically associated with low risk of dividend cuts for insurance companies during recessions

The retained earnings, after paying dividends, over the coming years are expected to allow for the potential repurchasing of up to 25% of the company's stock.

At current valuations, Prudent has the potential to grow 8% annually through buybacks alone.

• PRU has been able to grow at modest rates even in low-interest-rate environments

• 2% is the historical buyback rate

Prudential has $13 billion in net debt right now. The retained earnings alone could repay 70% of that debt.

Over the next three years, management's $10 billion capital return plan represents a 69% consensus payout ratio.

In other words, Prudential expects to reinvest a lot of profits into its long-term growth.

(Source: Investor presentation)

By 2023 it plans to not only cut $750 million in expenses (after just completing a $450 million cost-cutting program in 2020) the company plans to have over 30% of its earnings coming from faster-growing businesses.

(Source: Investor presentation)

Prudential's asset management business makes up 18% of profits currently but has seen steady inflows due to 95% of its funds outperforming their benchmarks over the last decade.

• A track record that surpasses even TROW, the king of active management.

Prudential is one of the 10 largest asset managers on earth. And it's doing a great job attracting organic asset flows thanks to being in the to 5% to 10% of its peers as far as fund performance is concerned.

(Source: Investor presentation)

PRU is partnering with some of the strongest and most trusted insurance companies in Latin America, Asia, and Africa to try to break into those markets via joint ventures.

For context, the UN estimates that by 2,100 Africa's population will hit about 4 billion. It's the youngest continent and is expected to see the strongest economic growth. Not just for years, but eight decades.

Prudential's ability to gain a foothold in emerging markets, while growing a thriving asset management business, creates growth catalysts that relatively few peers enjoy.

What does all this mean for Prudential's growth outlook?

(Source: FactSet Research Terminal)

(Source: FAST Graphs, FactSet Research)

(Sources: Yahoo Finance, Reuters/Refinitiv) 13 out of 15 analysts

• PRU is pricing in between -1% and 3.4% annual growth forever.

• Which is still far less than what analysts expect.

(Source: FAST Graphs, FactSet Research)

• In a higher regulatory/low rate environment TROW has delivered consistent growth.

• Analysts expect future growth to be similar to the 6.3% of the last eight years (which includes the worst recession in 75 years).

At these valuations, anyone who avoids becoming a forced seller for emotional or financial reasons can't lose money over the long term as long as PRU grows faster than 0%.

• The definition of an anti-bubble Buffett style "fat pitch."

But what's exciting about Prudential is not only is this one of the highest quality insurance giants you can buy but it's also a wonderful company at a still wonderful price. Even after a 152% rally.

Reason 2: At A Still Wonderful Price

Finance is one of the few sectors where book value is still meaningful.

(Source: Gurufocus Premium)

Over the last decade, a period in which 10-year yields averaged 2.4%, PRU grew its book value by 9.6% annually. The median growth rate over the last 13 years, including the financial crisis, was 7.9%.

• 2% to 3% is the blue-chip consensus average expected interest rates for the 2020s

This track record of consistent growth in low-interest-rate environments is why we were buying Prudential so heavily in 2020 when the market was freaking out over record-low interest rates.

Who cares what interest rates are today? Only the long term matters to a company's long-term fundamentals growth.

And when 21 experts, including 15 analysts and six rating agencies, all say Prudential is likely to keep growing steadily even in a perpetually low rate environment, well with a sufficient margin of safety, that's a low risk/high probability opportunity.

As far as book value goes, PRU's historical P/BV is 0.82, and today it trades at 0.55.

• 32% historical discount to fair value.

• Compared to a 28% discount based on earnings, dividends, EBITDA, and EBIT.

(Source: FAST Graphs, FactSet Research)

In the modern era of higher regulations and low interest rates, PRU consistently trades at between 8.5x to 9.5x earnings.

• 90% probability that if PRU keeps growing at its historical rates, which is what analyst expect, that it will continue trading within this market-determined fair value range

But earnings are just one valuation metric and it's important to consider several.

Metric	Historical Fair Value Multiples (10 years)	2020	2021	2022	2023
5-Year Average Yield	3.82%	$115	$120	$129	$144
13-Year Median Yield	2.85%	$154	$161	$173	$193
20- Year Average Yield	3.03%	$145	$152	$163	$181
Earnings	9.0	$92	$104	$115	$123
EBITDA	9.3	NA	$153	$164	$165
EBIT (Operating Income)	7.7	NA	$111	$120	$129
Average		$122	$130	$140	$151
Current Price	$93.04
Discount To Fair Value		23%	28%	34%	39%
Upside To Fair Value (Not Including Dividends)		31%	39%	51%	63%

Click to enlarge

(Source: FAST Graphs, FactSet Research)

PRU is trading at approximately a 28% discount to the average historical fair value, creating very strong short-term upside potential.

• 2021 fair value range: $104 and $161

• 2021 Harmonic Average Fair Value (smooths out outliers): $130

Rating	Margin Of Safety For 9/12 Blue-Chip Quality Companies	2020 Price	2021 Price	2022 Price
Potentially Reasonable Buy	0%	$121.53	$129.74	$140.31
Potentially Good Buy	20%	$97.22	$103.79	$112.25
Potentially Strong Buy	30%	$85.07	$90.82	$98.22
Potentially Very Strong Buy	40%	$72.92	$77.84	$84.19
Potentially Ultra-Value Buy	50%	$60.76	$64.87	$70.16
Currently	$93.04	23%	28%	34%
Upside To Fair Value (Not Including Dividends)		31%	39%	51%

Click to enlarge

PRU is still a potentially good buy, even after rallying 153% off the March 2020 lows.

In fact, it's just 2% above the potentially strong buy price.

What kind of long-term returns can we expect from a world-class anti-bubble blue chip?

Reason 3: Market Smashing Long-Term Return Potential

Here's a reasonable idea of what kind of returns you can expect buying PRU today.

Prudential 2023 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

If PRU grows as analysts expect through 2023, and returns to historical fair value, then analysts expect:

• 47% total returns

• 15.1% CAGR returns

• vs -1.0% CAGR S&P 500

PRU at its current discount has the potential to outperform the S&P 500 by 48% over just the next three years.

(Source: FAST Graphs, FactSet Research)

Over the long term, PRU's return outlook is far more attractive.

Prudential 2026 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

If PRU grows as analysts expect through 2026 then investors can expect:

• 92% total returns (almost doubling your money)

• 12.1% CAGR

• vs 4.5% CAGR S&P 500

• Almost 3X better than the market's consensus return potential

(Source: FAST Graphs, FactSet Research)

Over the long term, analysts expect:

• 4.9% yield + 6% growth = 10.9% CAGR very long-term total returns (after valuation changes cancel out)

• vs 7.9% for the S&P and 10.6% for the dividend aristocrats

Aristocrat matching return potential + 2.5x the yield to start with.

3% better annual returns compared to the S&P 500 might not sound like much. But believe me, it can make the difference between retiring in comfort, retiring in splendor, or not retiring at all.

Prudential Vs S&P 500 Inflation-Adjusted Total Return Forecast: $1K Initial Investment

Time Frame (Years)	5.9% LT Inflation-Adjusted Returns (S&P Consensus)	8.9% Inflation-Adjusted Returns (PRU LT consensus)
5	$1,331.93	$1,531.58
10	$1,774.02	$2,345.73
15	$2,362.87	$3,592.68
20	$3,147.16	$5,502.47
25	$4,191.79	$8,427.47
30	$5,583.14	$12,907.33
35	$7,436.33	$19,768.59
40	$9,904.63	$30,277.16
45	$13,192.23	$46,371.87
50	$17,571.06	$71,022.18

Click to enlarge

Even modest investments into steadily growing blue chips at attractive valuations and yields can add up to fortunes over time.

If PRU grows as it has historically, and analysts expect it to for the foreseeable future, then over 50 years it could turn $1 into $71, adjusted for inflation.

Time Frame (Years)	Ratio S&P vs PRU inflation-adjusted consensus LT return potential
5	1.15
10	1.32
15	1.52
20	1.75
25	2.01
30	2.31
35	2.66
40	3.06
45	3.52
50	4.04

Click to enlarge

Even modest outperformance can add up to impressive sums over decades. If PRU is able to grow at 6% as it historically has and analysts expect, then over the next 50 years it could potentially quadruple the market's wealth compounding power.

Of course, PRU is only a potentially excellent investment for people:

• Comfortable with the risk profile.

• Own it within a diversified and prudently risk-managed portfolio.

Risk Profile: Why Prudential Isn't Right For Everyone

There are no risk-free companies, and before you buy any stock you need to be comfortable with the fundamental risk profile.

Fundamental Risk Summary

As of Dec. 31, 2020, Prudential had approximately $554 billion of invested assets on its balance sheet.

The vast majority of Prudential’s corporate debt is investment-grade and is well diversified across various industries such as financial, consumer non-cyclical, and utilities.

Prudential also faces risk from claims in excess of the amount reserved. In 2018, Prudential did raise reserves for legacy long-term care products it sold.

Prudential investment yields are affected by interest rates. In addition, Prudential’s equity securities on its books and its asset management business are affected by equity market movement.

Given that Prudential’s financial results are dependent on a variety of factors outside the firm’s control, our fair value uncertainty rating for Prudential is high." - Morningstar

The insurance industry's risk profile includes:

• Unexpected higher costs (such as for long-term care, i.e. nursing homes)

• Unexpected disasters such as the pandemic

• Interest rate effects on profitability

• PRU, in particular, is also sensitive to the performance of global stock and bond markets

(Source: Investor Presentation)

Prudential estimates its total COVID-19 mortality liabilities will be about $515 million.

That's compared to $4.5 billion in profit analysts expect in 2021 based on management guidance. In other words, a company this financially strong can weather even the worst pandemic in over 100 years with relative ease.

ESG Material Financial Risk Analysis

• Essential To Fully Understanding A Company's Overall Risk Profile

According to the world's best risk assessors, ESG metrics are a critical component of a company's overall risk profile. Here's who considers ESG important and builds it into their safety models and ratings.

• BlackRock - #1 asset manager in the world

• MSCI - #1 indexing giant

• Morningstar

• Reuters/Refinitiv

• ISS (Institutional Shareholder Services) - #1 corporate proxy firm on earth

• S&P

• Fitch

• Moody's

• DBRS (Canadian credit rating agency)

• AM Best (insurance industry rating agency)

• Bank of America- one of the 16 most accurate economic/analyst teams in the world according to Market Watch

• Bloomberg

• FactSet Research

• State Street - one of the largest custodial banks on earth

• Wells Fargo - one of the 16 most accurate economic/analyst teams in the world according to Market Watch

• NAREIT

Companies with strong ESG profiles may be better positioned for future challenges and experience fewer instances of bribery, corruption, and fraud." - MSCI

Bank of America's research finds that ESG metrics also help improve the long-term profitability and outcomes at companies.

Punch line: Higher ROE, lower risk and lower cost of capital.

We find that companies with greater gender diversity at the board/management level typically see higher ROE and lower earnings risk than peers.

Moreover, based on disclosure data from ICE, we find gender diversity in management is associated with a ~20% premium on P/E on an overall and sector-neutral basis.

Ethnic and racial workforce diversity shows similarly strong results: higher ROE, lower risk, and significant premia on P/E and P/BV." - Bank of America

ESG isn't about political correctness, it's about sound business practices and maximizing long-term profits by looking at the long term.

Prudential Consensus ESG Risk Rating

Rating Agency	Industry Percentile	Rating Agency Classification
MSCI	85.0%	A, above-average
Morningstar/Sustainalytics	86.1%	20.8/100 medium risk
Reuters/Refinitiv (Combined ESG Rating)	60.0%	above-average
Consensus	77.0%	good

Click to enlarge

(Sources: MSCI, Morningstar, Reuters/Refinitiv)

According to Morningstar and Reuters, PRU's overall handling of its long-term financial ESG risk in the top 23% of its peers.

Prudential doesn't just talk the talk on ESG risk, they walk the walk.

(Source: Investor Presentation)

Diversity at all levels is beneficial to companies because it allows you to better adapt and market to people all over the world.

• Companies without sufficient diversity will be at a disadvantage to those with high diversity.

(Source: Investor Presentation)

PRU's board is large, independent, diverse, and experienced.

(Source: Investor Presentation)

The company spends hundreds of millions on community outreach to engender goodwill, enhance its brand, and make global growth easier.

(Source: Investor Presentation)

PRU's workforce diversity, at all levels, is superior to the insurance industry average.

• Thus a competitive advantage vs its rivals.

(Source: Investor Presentation)

PRU has taken the commonsense approach of paying its workers equally for equal work.

• Thus allowing it to attract and retain some of the most skilled employees in the industry.

• Those employees ultimately deliver 100% of shareholder value.

• Keeping them happy and motivated is just good business.

(Source: Investor Presentation)

PRU also is an industry leader in training and skill-building for its employees.

• Investing in your greatest resource is reasonable and prudent.

• Almost all good companies do it PRU just breaks out the details.

(Source: Investor Presentation)

2020 was a tough year for everyone. Yet according to its annual employee survey, just 8% of PRU employees don't feel valued by the company.

(Source: Investor Presentation)

PRU is working hard to minimize pollution, not because of moral or political reasons.

• No company profits from pollution, it's a by-product of business

• If you minimize pollution you make more with less waste

• That's called efficiency

• And the efficient a company is the more profitable it is

• And the more dividend it pays us

• The "E" in "ESG" is really about maximizing long-term profits

(Source: Investor Presentation)

Mitigating climate change isn't about PRU trying to suck up to liberals. Guess what you call an insurance company that ignores rising disaster costs in the future?

Bankrupt.

Guess what you call a company using the best available actuarial data to plan for rising future disaster costs? Smart, and a survivor that will steal market share from the companies that failed to plan and become resilient.

(Source: Investor Presentation)

And PRU is working with its suppliers to make sure they are managing their ESG risks as well.

• Because if your suppliers are struggling in the future so will you

• And if your suppliers are thriving you will too

Prudential is a member of the DK Strong ESG Watchlist.

(Source: DK Strong ESG Watchlist) - sorted by highest yield

• green = potentially good buy or better

• blue = potential reasonable buy

• yellow = hold

• red = potential trim/sell

For context, the safety and quality of this watchlist match that of the Dividend Aristocrats.

For anyone wanting to invest via ESG risk ratings, it's important to always remember to focus first and foremost on the fundamentals.

• ESG risk ratings are like credit ratings

• An important risk indicator that helps determine a company's overall quality

According to a 2019 study by Research Affiliates, a pioneer in alpha factoring investing, ESG currently isn't a standalone factor.

However, ESG like credit ratings can help indicate other factors, such as consistent dividend growth and overall quality.

Both of which are most certainly alpha factors.

Valuation Risk

PRU at 8x earnings is not a high-risk decision, as long as you remember that insurance companies naturally tend to trade at lower valuations.

This means that the 15 PE rule of thumb that Ben Graham popularized doesn't work for this industry.

The risk profile for insurance is such that high single-digit/low double-digit multiples are the industry norm.

What does this mean for PRU? Well, volatility risk isn't elevated at its current 8 PE or 0.55 P/BV.

However, volatility risk is something that all investors must be comfortable with if you're going to make a fortune on Wall Street.

Volatility Risk

The average standalone company has 28% annual volatility. The average dividend aristocrat 23%. PRU's average annual volatility over the last 15 years is 44.3%.

Does that mean PRU is a bad company? No, it just means that it periodically experiences gut-wrenching drops. Which is always a benefit to prudent long-term investors and dangerous only to those who become forced sellers for emotional or financial reasons.

Volatility caused by money managers who speculate irrationality with huge sums will offer the true investor more chance to make intelligent investment moves.

He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times." Warren Buffett

Remember PRU is a blue-chip quality industry giant. It has a fortress balance sheet and a very safe dividend that has now been tested in the worst recession in 75 years.

• The ultimate baptism by fire

In March 2020 Prudential bottomed at a 66% discount to fair value, 73% discount based on book value.

• Prudential's yield in March hit 11.2%

• Locking in long-term consensus total returns of 11.2% yield + 6% growth = 17.2%

Anyone who recognized PRU's strong fundamentals during the panic phase of the pandemic was able to lock in long-term returns on par with the greatest investors in history.

All from an anti-bubble blue-chip bargain hiding in plain sight. At no point did analysts or rating agencies think PRU was at high risk of growing at a negative rate, cutting its dividend, or defaulting on its obligations.

In other words, even in the darkest days of the pandemic, when the global economy was on fire, PRU was never a "dirty value" speculative company.

So now, with that context in place, let's consider PRU's impressive, and potentially mind-blowingly profitable historical and future potential volatility.

Prudential Peak Declines Since 2002

(Source: Portfolio Visualizer)

PRU is currently in the second worst bear market in its history, a 52% peak decline that began when it was 22% overvalued.

The largest crash was the Great Recession when PRU was 41% overvalued, and growing at over 20% annually due to dangerous derivative gambling.

(Source: FAST Graphs, FactSet Research)

From the Great Recession lows, when PRU was a dirty value speculative investment, investors have made almost 660% total returns or 18% annually.

And remember PRU isn't yet back to fair value and remains in a bear market.

What 2020 proves is that in the future, we're likely to see short bear markets that send PRU down to Great Recession level valuations, but the actual fundamental risk to the company and its dividend are likely to be relatively small.

Future Volatility Risk

(Source: JPMorgan Asset Management)

Since 2009 and 1945 the market has averaged a 5%-plus decline every six months. The reasons for the falls are always different, but as you can see JPMorgan's blue-chip economists expect future market declines to basically match the historical pullback's average of a 7% decline.

Prudential, as a higher volatility company, is expected to fall significantly more, about 11% in the average future market pullback. The causes of those future declines could be anything and the causes of future short-term declines don't matter.

You need to be prepared emotionally for corrections if you want to own Prudential. And if you are you can potentially convert market fear into a glorious high-yield opportunity.

The key to achieving your long-term goals is to survive the short-term periods of market volatility to reach the fundamentals determined future.

Dividend Sensei Risk Management Guidelines

• Always begin with proper asset allocation (with annual rebalancing) meaning owning enough bonds/cash equivalents to avoid becoming a forced seller for emotional or financial reasons during market downturns

• Own a diversified portfolio of 15 to 60 companies in 9 to 11 sectors, and use ETF/mutual funds to target sectors/asset classes you're not experienced with (such as bonds)

• Limit individual holds to 1% to 7% of your portfolio depending on quality and risk profile

• 1% or less for very speculative companies (such as Fallen Angels like Boeing (BA))

• 2.5% or less for 7/12 average quality companies or speculative companies (regardless of quality)

• 5% or less for 8/12 above-average quality companies

• 7% or less for 9+/12 blue-chip, SWAN, Super SWAN, or Ultra SWAN quality companies

• Risk cap recommendations are for % of long-term invested capital

• You can overweight high conviction companies as long as you can eventually dilute the investment to your targeted risk cap

• Limit industry exposure to 5% to 10% or less of your invested capital

• Limit sector exposure to 10% to 20% or less of your invested capital

These are the risk-management guidelines that

• I've been perfecting over seven years

• With input from colleagues with over 100 years of asset management experience

• That have been stress-tested about 300 times

• Using historical market data

• And JPMorgan's future risk assessment scenarios

• And 30 and 75 year Monte Carlo simulations

• All Dividend Kings portfolios use these risk-management guidelines

• 100% of my life savings is entrusted to these guidelines

• Whatever risk-management rules are best for your specific needs stick with them

Bottom Line: Prudential Is Up 152% And Still Has Room To Run

You might think that any blue-chip that's up 152% off its lows can't possibly be a bargain.

But think of it this way. In March 2020 Prudential bottomed at a price/book value of 0.22 meaning you could buy $1 of assets for $0.22. That was a glorious bargain opportunity.

When we recommended Prudential last, it was about 0.36 book value. Today it's 0.55. The bargain might not be as great but when is it ever a mistake to buy a company expected to grow at 4% to 9% over time, that effectively lets you buy $1 for $0.55?

Today Prudential is still 28% undervalued and yielding a very safe 4.9%, more than 3x the S&P 500.

What's more Prudential's expected growth rate of 6% means about 11% long-term total returns, that the S&P 500 almost certainly won't be able to match over time. Even the famous dividend aristocrats are expected to struggle to attain close to those returns.

Prudential today is priced for -1% to 3.4% growth, depending on what valuation models you use. Anytime you can buy world-class quality assets, run by trustworthy and adaptable management, at this kind of discount, that represents a classic Buffett style fat pitch.

This is why we're recommending Prudential yet again.

We can't promise you that Prudential will generate instant profits, no one can promise that. What we can tell you is that one of the world's best insurance giants has proven it can withstand the worst recession in 75 years, while raising its dividend, and positioning itself for decades of solid growth.

It's time to stop praying for luck on Wall Street, and start making your own.

Luck is what happens when preparation meets opportunity." - Seneca the younger

Prudential represents one of the most reasonable and prudent high-yield blue chips you can buy today.

PRU is a great example of a Buffett-style wonderful company at a still wonderful price.

• Dividend growth investing done right

• High-yield investing done right

• Total return investing done right

• ESG investing done right

PRU is, simply put, smart investing, done right.

Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

Analyst’s Disclosure: I am/we are long PRU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Dividend Sensei is also Long PRU.

Comments

[Sergi Medina]

Very interesting and useful analysis, as always! I noticed the potential too, that's why I've been adding lately. Amazing PRU, awesome dividend!

[Brad Thomas]

@Sergi Medina Thank you....

PS: Message me if you would like to get 30% off iREIT on Alpha today....
It's my birthday and I want to give everyone a gift 🎁 🎁 🎁

[AdNeMa]

@Brad Thomas Thanks for the article Brad.

What would you say the reason is behind why insurance companies trade at very low multiples these last few years? Both Prudential/Manulife and I suspect others have this attractive feature.

Market still emotionally scarred from 2008? I remember the whole AIG thing but was young at the time. Or is Mr. Market pricing in possible future higher interest rates that somehow impact insurance companies greater than other industries?

I'm almost convinced but seems like too nice a deal.

[Brad Thomas]

@AdNeMa The market is pricing most insurance companies about 10X earnings because of several factors including higher regulations, and lower interest rates for the foreseeable future.

Be careful with assuming rules of thumb apply to all industries. If you ever see insurance companies trading at 15X it's likely an epic bubble.

Come and visit us at iREIT on ALpha...

All the best - Brad

[integritycoatings]

What about their announcement on reinsurance today?

[The Cardinal]

And PRU breaks above 100. Wow. I'm up over 50% in 9 months not including dividends on a "rock solid" company. Not a high flier. And up 30% in 5 months on the larger retirement portion of my PRU holdings, not including dividends.

But if it gets to 120 by the end of the year, I'm going to have to lighten my retirement portion. It's possible.

[ALLDAY1]

@cardinal933
Good for you I am up only a paltry 47%, but still currently not my best stock as my CSWC is up 84% . I thought about reducing my share count by selling some but like the .52 dividend on CSWC is simehow satisfying and well I don't need too. My only regret about PRU is that I do not have more shares (currently 549 ) and while this may seem like a silly reason for owning it even after I did the research and was still on the fence about investing something that I read said "It's an insurance company, you can't go wrong!" That was the final push.
Anyway GOOD FOR YOU AND CONGRATS!

Allday

[The Cardinal]

@ALLDAY1 Thanks. You too. But if it gets to 120 in the next year or so, I will be very tempted to trim my position.

[ThisIsMyName]

@cardinal933 I know, right? This stock market is making everybody look like a genius. So enjoy it while it lasts!

[momoneymoproblems1]

So PRU cut their dividend during the Great Recession but not the pandemic? Decent, but not quite the rock it uses for a brand.

[The Cardinal]

@momoneymoproblems1 - you don't know what you're talking about. Do some homework.

PRU only cut their dividend during the Great Recession because (listen carefully now) the Feds REQUIRED them to cut it. All banks and systemically important financial institutions including PRU were so required. They reinstated it just as soon as the Feds let them do so (2010).

So do your homework before making up stuff.

[ALLDAY1]

@cardinal933 I need a little more information on the dividend cut during the recession as this is the only thing I could find

For the first time, Prudential Financial Inc. of Newark, N.J., has cut its shareholder dividend for 2008.
Shareholders will receive an annual dividend of 58 cents per share of common stock Dec. 19, down by about 50% from the dividend paid out in 2007.
The carrier had a tough third quarter.
Prudential booked a net loss of $108 million, or 23 cents per common share, for its financial services business, which includes investments, insurance and corporate units.
That’s down from a profit of $860 million, or 74 cents per common share, in the comparable period last year.

I could find nothing on the FED forcing that requirement.
Also at that time they were paying annually.

Thanks

Allday

[The Cardinal]

@ALLDAY1 - yup they wrote down a ton of assets which on a GAAP basis reversed their profits to a loss. I was around at the time. BOA, JPM, WF, etc. including PRU had to cut their dividends. There is no way almost 15 years later that I can find the government circular about the systemic issues going on then. By 2010 they had restored the dividend completely and the rest is history - from .58 to $4.60 in a decade. If that doesn't impress you, nothing will.
And in this past pandemic year PRU increased the dividend yet again. LOL. Solid as a rock.

But you don't have to invest in PRU. That's why they call it a market. I'm up 50% in less than a year and have gobs of retirement income from it. I'll stand pat.

[Brad Thomas]

Don't miss Brad's Saturday Update:

seekingalpha.com/...

[Richie-Rich]

About ready to print a Benjamin

[integritycoatings]

Another new 52 week high today. Wow.

[The Cardinal]

@integritycoatings Pushing to 100. My gain is over 50% and I didn't even get it anywhere near the bottom. Glad I totally loaded up on it though.

[Richie-Rich]

@cardinal933
Same here....before anyone was yapping about it.
Now that is it doubled, we get an article everyday.

Sell at 100 and buy back lower?

Usually those big round numbers are hard to get through

[The Cardinal]

@Richie-Rich - I am a dividend income focused investor, so I will hold unless PRU goes much higher and it becomes substantially over-valued (like another 20 points - which I don't see happening by the way). The dividend grows very rapidly over the years. This covid year is the first exception to big-time dividend growth in a decade, so I expect it to continue over the next 5 years. But, luckily, I hold a lot of it in a retirement account, so if I have to sell, much of my gains will be tax-deferred.

[thebrucemac]

I got in at $60 and added for a cost average under $61. Let it ride!

[The Cardinal]

@thebrucemac - good for you - you beat me by a few bucks. Yup - let it ride and the dividend on cost is stellar!

[integritycoatings]

Hit a new 52 week high today. 😀

[ALLDAY1]

@integritycoatings
For those of us who have PRU it was a great day and for those of us who also own PM it made it an even better day as it also had a 1 year high.

Wishing the best for everyone

Allday

[muskellunge55]

@ALLDAY1 If it keeps doing this, it will become a capital gains stock, not a dividend stock. I don't necessarily smile when the price goes up. Just means I buy fewer shares in reinvestment. Less income.

[ALLDAY1]

@muskellunge55
I do not drip. It becomes a cap gain stock only if you sell. If you only want dividends with small gains buy CEF's . You see how you invest is strictly a personal choice and part of investing can in most cases result in Cap Gains , and well it can result in a higher tax. A stock that never goes up in value means that he only return you get is the dividend. I expect more than that from my investment . Maybe you do not .

Allday

[fellowinvestor45]

Hope you're right. I bought shares back in 2017 at $90 when price targets hovered in the $120-130 range and bullish articles like this were coming out weekly. Obviously those did not come to fruition in the short or medium-term. My hypothesis for PRU is that they'll benefit from aging populations, so as long as they deliver modest capital appreciation and a dependable/growing dividend, I'll be a happy shareholder.

[Consideration]

Amazing depth.

[The Cardinal]

I bought a bunch at 64 and then a bunch more at 75. And I mean a bunch. Between this and my holdings in EPD, my retirement income is set and secure. And I have owned a lot of BX for over 5 years for a bit of capital appreciation and some WPC. Together its an amazing amount of income.

Dividend investing has its benefits if you are careful, pick companies that are secure and modestly diversify (I don't believe in owning 50 stocks like some here do).

[m1chael]

@cardinal933 20 is my magic number

[ALLDAY1]

@m1chael Not everyone can handle a given number of positions. Only the investor knows what the number should be and at some point if and when the number is reached only they know if the next one is too many. There are also many investors who limit the number of shares in a given position and you see it all the time with certain comments such as I have a full position, a half position, or in case's like myself who will actually disclose the number of share owned. At one time I stated that I would own no position that was over 500 shares, but over the years have changed that number. The number had more to do with my fear of taking a loss as opposed to any other reason and now today although I don't like taking a loss I have overcome that fear ( well partially ) LOL I have 44 positions and all pay dividends across 3 portfolios m 2 income and an IRA. My largest position has 7671 shares and the average number of shares per position is 1157.

Allday

[ALLDAY1]

Helps to solidify my earlier choice to invest as I was also able to buy at a reduced price due to covid
I have 549 shares

allday

[smurf]

Too few details in this article.

PRU is one I failed to act on a year or so ago. Fairly to over priced now.

[Brad Thomas]

@smurf i trust your sarcastic... this one is loooooooooooooong and packed with many nuggets.... all the best

[Dividend Hummingbird]

I love your ridiculous hyperboles... 'extra super duper speculative SWAN'
So silly

[Brad Thomas]

@itamar ככ I actually liked it :) to each his own ;)

[Robert & Sam Kovacs]

I knew this was you from the title before my subpar Indonesian WiFi even loaded your avatar.
Great article.
PRU is a layup.
Happy investing
Sam

[Brad Thomas]

@Robert & Sam Kovacs Ha.... Indonesian WiFi... Huh? Take care and thanks for reading.

[Robert & Sam Kovacs]

@Brad Thomas Yes, I've been waiting on Indonesian islands since the onset of the pandemic... it's a hard life.

Take care,

Sam

[Clearview60]

Thank you for the in-depth article! Loving my PRU, currently my #5 holding.

[Brad Thomas]

@Clearview60 Thank you!

[only-temporary]

Anybody worried about $LMND taking customers away? What if you combine tech to big data to make the whole process easy and fast? Although you'd think the execs at $PRU are spending a lot of money on tech as well.

[ALLDAY1]

@only-temporary Expensive and no dividend.
For me unproven..

Allday

[Brad Thomas]

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