Life assurer Prudential (LSE: PRU) (NYSE: PUK.US) is one of my favourite stocks. That’s not just because a 15% hike in the dividend represented the third upward rebasing of the payout in the past four years — though the confidence implicit in the dividend policy is testimony to the company’s prospects.
Prudential has sought out markets that are growing now and have lots of scope for future growth. It has established a strong position in those markets and is exploiting its position brilliantly.
Picking winning markets
Prudential’s three main markets are Asia, the US and UK. Asia provides the big growth potential. Demographics and economics work in its favour — a larger and increasingly wealthy Asian middle class has driven a lot of businesses that depend on discretionary spending. And the absence of strong social safety nets in Asian countries means there’s pent-up demand for health and life assurance products, combining savings with protection. It also means that historically there hasn’t been strong local competition.
Prudential is market leader in six out of its 13 Asian markets, and the company has set targets stretching out to 2017. But, ultimately, competition will intensify, particularly from Chinese insurance companies, and this no doubt explains Prudential’s early steps into Africa. The company has bought a small Ghanaian insurer to test the water. In the meantime the company is also thought to be looking at Latin America.
Mature – and maturing
The US and UK are more mature markets, so here Prudential’s strategy is to target demographic changes. Its business in variable annuities in the US is based on exploiting the transition into retirement of the baby-boomer generation. In the UK, the fund management arm M&G is a beneficiary of an ageing population.
Prudential typically distributes its products through third-parties. It has renewed a bancassurance agreement with Standard Chartered for a second 15 year period, giving it exclusive access to Standard Chartered’s customers in nine countries and preferential treatment in another three, including China.
Management
Much of Prudential’s recent success is down to management — after all there’s not much to differentiate the product of one life assurer versus another. So it’s perhaps understandable that CEO Tidjane Thiam has allowed himself the indulgence of pointing out that if shareholders had backed his proposed takeover of AIA in 2010, they would have done rather well out of it. In the event he had to prove his credentials, and the business case for expansion in Asia, the hard way.
On a PE of 15.5 and yielding 2.5% Prudential is fairly priced. There is plenty of scope for further growth, and for me it’s a good long-term hold.
