It’s been a good week for Prudential (LSE: PRU), with shares in the FTSE 100 income stock jumping an impressive 11.82%.
The Asia- and Africa-focused insurance and savings giant was lifted by news that China will now be easing its Covid lockdown policy. It’s rare positive news for the Pru on this front, as pandemic movement restrictions have squeezed its revenues, profits and shares. Its stock is down 37.79% measured over a year and 43.26% over five.
Prudential used to be a favourite portfolio holding of mine and I did well out of it. But I’m glad I banked my profit six or seven years ago. It’s fallen steadily since I sold, and the yield is at the low end too. Today, investors get just 1.7% a year, which is underwhelming, given that many top FTSE 100 income stocks now yield 6%, 7%, 8%, or more.
This income stock has underperformed
In 2020, Prudential slashed its dividend in half, when selling its US-based operation Jackson National Life. It assured investors it would reinvest the money to generate strong growth and bumper profits from Asia and Africa, yet that hasn’t borne much fruit yet.
The 2019 decision to split from asset management arm M&G was also justified by the same logic. Again, the promised benefits have been slow to materialise.
Prudential’s emerging market strategy was always going to be one for the long-haul, and the pandemic has extended the journey time. The Omicron variant forced restrictions during the first half of 2022. Not just on the Chinese mainland but also Hong Kong, India, Indonesia, Thailand, Vietnam, Malaysia and Singapore.
Given this headwind, Prudential arguably did well to increase sales by 9% to $2.11bn. Adjusted operating profit increased 8% to $1.66bn, boosted by a 32% reduction in central costs, Prudential said. CEO Mark FitzPatrick hailed the group’s “resilient operational performance” and “multi-channel, digitally enhanced distribution platform.”
There were signs that sales were picking up in Q2 as restrictions eased. With China now opening up, this progress should accelerate. So will loyal investors finally enjoy their long-promised rewards?
Its dividend is covered a thumping 5.9 times by earnings. That suggests there is plenty of scope for growth and management is stepping up efforts. In August, it announced the interim dividend would increase by 7% to 5.74 US cents a share.
Weak pound should boost earnings
Figures published earlier this year by Brewin Dolphin showed the dividend should grow by 13.24% this year, then by 8.26% in 2023 as the “re-focussed and leaner business becomes more cash generative”. That offers some hope of brighter times.
Prudential also has “financial resilience, capital strength and capability,” FitzPatrick says, and should build shareholder value over the long-term. Right now, it looks reasonable value, trading at just 10.1 times earnings.
The company may also benefit from the weaker pound, as this will increase the value of its earnings once converted back into sterling. So would I buy it today?
Prudential is heading in the right direction and may start to justify investors’ faith now that recent reorganisations are behind it. Yet I’m not a buyer.
There are cheaper FTSE 100 stocks out there, with higher yields. Income stocks Persimmon, Aviva, Rio Tinto and Unilever are some of those to tempt me lately. I’d buy them ahead of Prudential.
