The Prudential (LSE: PRU) share price gained 3% in early trading on 30 August, after the insurer posted a 6% rise in H1 operating profit.
Times are changing, as CEO Anil Wadhwani said: “We have today announced that we will do things differently in the way we run Prudential.“
The insurer, once known for being perhaps a bit dull but steady, is going through quite an upheaval. Aviva has also seen the need to refocus. So that seems to be a sector theme these days.
All change
Prudential has dumped its European and US operations, and now focuses mainly on Asia, with a small African business. It sees potential in India too, so that’s a segment to keep an eye on.
It also demerged M&G in late 2019, as part of this new focus.
So the Pru has changed a lot, and I think there’s a key thing there for us. The new Pru is just not the old Pru. And what we thought about the old one is history. We need to start from scratch.
Valuation
Prudential has been on a high valuation among insurance stocks for some time. But is it worth a price-to-earnings (P/E) ratio of 13 now, when its forecast dividend yield is just 1.6%?
At the same time, rival Aviva’s 8.6% yield gets it a P/E of only 12. And at Legal & General, there’s a P/E of 12 for a 9.2% yield.
New business
It’s all about new markets at Prudential, and that looks good at this stage. New business profit rose by 39% in the half, to $1.5bn. It seems 17 of the Pru’s life markets showed growth, with 16 of those in double digits.
Prudential has two big targets in mind. It aims to grow new business profit by 15% to 20% per year between 2022 and 2027.
The board also wants “double-digit compound annual growth in operating free surplus generated from in-force insurance and asset management business between 2022 and 2027“.
Double-edged?
The new CEO, who’s only been in the job since February, does seem ambitious. And those targets could well justify the stock valuation.
But they raise a risk too. If a firm sets lofty goals, but doesn’t quite make them, it can set up the stock for a fall.
Investors always want their companies to beat targets, and can turn away if they miss by even a small margin. That must raise the pressure, since Prudential chose to dump its old focus and chase Asian growth.
Time to buy?
Forecasts show the P/E dropping to around 10 by 2025. And the dividend yield should grow to about 2% by then. That looks like a more attractive valuation to me. And if the firm can hit its big targets, I think it might make it a good buy now.
But those rivals’ valuations look set to fall in the next few years too. And I just see better buys in the sector that don’t face the same new risks.
