Prudential share price falls on FY results. Time to buy for growth?

Prudential returns to profit, as new business in Hong Kong booms. But the share price has responded weakly as new growth can bring new risk.

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The Prudential (LSE: PRU) share price fell 7% early on 20 March, despite a rise in 2023 profits.

We heard that “Hong Kong was a significant contributor to growth accounting for 45% of new business profits in the period.”

Hmmm, Hong Kong is in the news for less good reasons. Might that be behind the price dip? The shares are now down 40% in the past five years.

Strong performance

Prudential cited a “continuing strong performance” and saw new business profit climb 43% to $3.1bn. There’s also an IFRS profit after tax of $1.7bn, from the $997m loss we saw the prior year.

It comes from what CEO Anil Wadhwani said is “a relentless focus on execution in our markets in Asia and Africa.

He added that “we are increasingly confident in achieving our 2027 financial and strategic objectives and in accelerating value creation for our shareholders.

Shareholder returns

The full-year dividend is up to 20.47 cents per share. That’s a 9% hike, but it’s still a yield of just 2%.

Forecasts show a boost in the next few years, to 2.4% by 2025. That’s still not great. But it should be well covered by earnings.

The dividend though, is one of the key things that would sway any decision for me on whether to buy Prudential shares.

Weak dividend

Insurance can be a cash cow in the good times. We do get poorer times in a cyclical sector like this, but long-term rewards have been great over the years.

But right now, why should I go for the Pru’s 2% dividend yield when it looks like I should get 7% from Aviva? Or I could get more than 8% from Legal & General?

Prudential’s been cautious, and tends to keep a much higher earnings cover than most. So total returns might still be up there with the rest.

Time of change

If the dividend grows ahead of inflation, I’d be good with that. But it all depends on how the firm’s refocus and new strategy goes in the next few years.

We’ve seen a refocus with Aviva, and I’d say that one’s turning out well. But it shows it can take quite some time. And the market has seemed wary of financial firms when they’re changing direction. The big City investors seem to like risk even less in this area.

Risky growth

The new goal is to chase after profits from new global growth areas. And though Africa could well provide long-term gains, I think most eyes will be on Asia right now. Particularly China.

The firm saw 60% of new business profit come from the China region – including the mainland, Hong Kong, and Taiwan. The zone also made up 49% of gross premiums.

That could be great for growth in the decades ahead. But it does mean more risk from the Chinese economy. And it brings political fears.

Will I buy?

I do want to buy another business in the sector while it’s down. I’ll consider it. I might go for the growth potential I see at Prudential.

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.

Alan Oscroft has positions in Aviva Plc. 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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