Does the Prudential share price make the stock a buy?

The company’s directors think the Prudential share price is attractive and have been buying the stock. Should I follow them?

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The Prudential (LSE: PRU) share price appears to look attractive to at least two of the company’s directors. The insurance and asset management business made two notable director purchase announcements on Tuesday.

Chief executive officer Anil Wadhwani bought 9,400 shares and non-executive director Arijit Basu bought 1,361 shares.

With the share price near 1,154p, I estimate the costs of those purchases to be in the ball park of £108,470 and £15,705 respectively.

Optimistic outlook

So it could be argued that those investments are meaningful. Although I’m mindful that FTSE 100 company directors do tend to receive bloated salaries and payments. And the sums involved in these share purchases probably represent quite a small percentage of those directors’ incomes.

Nevertheless, directors buying is better than directors selling. And I think these purchases emphasise that the directors are optimistic about the prospects for the business.

Prudential operates in Asia and Africa. And the company last updated shareholders about progress at the end of April. Wadhwani said that business momentum had continued into the second quarter, “particularly in Hong Kong”

City analysts expect earnings to surge in 2023 by more than 170%. However, that’s after a weak 2022 when earning halved in value. But the business looks set to make further progress in 2024 with a further double-digit percentage uplift in earnings.

And set against those estimates, the forward-looking earnings multiple is around 11 for 2024. 

That valuation looks undemanding. But there’s one thing that bothers me about this stock and that’s the shareholder dividend.

The low dividend yield

The problem for me is that the yield is very low. The forward-looking shareholder payment for 2024 will only yield just above 1.5%. And that’s insufficient compensation for me to take on the risks of holding the stock.

In fairness, the dividend has been growing by robust single-digit annual increments since 2021. And the progress looks set to continue in the coming couple of years at least.

But businesses like this in the wider financial sector are notorious for the volatility often inherent in their operations. And a quick glance at the multi-year record for cash flow, earnings and shareholder dividends reveals many down years as well as up years in the figures.

Meanwhile, I think the share-price chart also shows how the business has struggled to make progress.

It seems to me that capital gains from a rising share price may prove to be elusive in the coming years. Although I could easily be wrong about that. 

After all, most City analysts appear to rate the company as either a ‘buy’ or a ‘strong buy’. And if world economies continue to improve, it’s possible that Prudential could enter an enduring period of profitable business growth ahead.

However, without the support of a chunky dividend to collect, I’m reluctant to get involved. So, for me, the stock isn’t a ‘buy’ despite the recent director purchases.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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