It’s had a weak 12 months, but the Prudential (LSE: PRU) share price has gained 25% since a low point in October.
I’m sure some of that is due to our economic outlook clarifying a little. We’re in for tough times, for sure, but it does look like some of the uncertainty is clearing. This year’s events remind me of why I think the insurance sector can be a good one for long-term investors.
I must stress my long-term view, because the sector can be cyclical and often shows short-term volatility. Even Prudential, which is generally considered unexciting even by the standards of the insurance business, has been through a rocky five years.
Long-term benefits
But I reckon long-term investors can profit from that volatility by buying during the dips, as part of a diverse investment portfolio. I’ve almost always held insurance shares myself, but I wouldn’t go too heavily into the one sector. I think it’s important to spread our stock market cash across a variety of stocks in different sectors, especially when the next few years look a bit shaky.
Prudential has never offered the biggest dividend yield in the sector. Right now, we’re looking at forecasts of less than 2%. But it’s generally been progressive. And over the long term, total returns from the Pru have been solid.
Today’s valuation might not exactly make the stock seem like a screaming buy. For the current year, we’re looking at a forecast price-to-earnings (P/E) multiple of around 18. And I think that could be a bit rich in more normal times.
Recovery ahead?
But it comes at a time when the finance sector has been through a very tough patch, and dividends have been cut back. And, more importantly, it’s also at a time when analysts think things are about to recover.
If forecasts turn out to be accurate, that P/E of 18 could drop to under 10 next year, and further again in 2024. And we’d be seeing the dividend yield creeping back up again.
I do have a concern over Prudential’s future, and that’s down to the company’s restructuring. With UK and US businesses spun off, the focus is now mainly on Asian markets. Generally, I like that plan, but it’s in its risky early days.
Uncertainty
Though many Asian economies look set to grow strongly in the coming decades, insurance take-up is very low compared to Western markets. There’s still quite a lot of uncertainty, though, when a company shifts its operating targets like this. And investors may well steer clear until they see how the new Pru makes out.
The current zero-Covid chaos in China is hurting Prudential’s largest market. In fact, in its interim report this year, the company said: “Although there are signs that Covid-19-related impacts in many of our markets are stabilising, over the remainder of the year we expect that operating conditions may continue to be challenging“.
So yes, things are definitely uncertain for Prudential as we head into 2023. But I can’t help thinking that the still-depressed share price might offer an attractive entry point for long-term investors.
