So far, 2024 has been dismal for FTSE 100 financial services giant Prudential (LSE: PRU). The Prudential share price has fallen 23% since the start of the year. As I write this on Wednesday morning (28 August), following the release of the company’s half-year results, the shares are down slightly in early trading.
Yet I think there is a lot to like here as an investor. So much, in fact, that I have been buying Prudential shares this year.
So, just what is going on with the share price?
Challenging markets hurt the investment case
Part of the appeal of Prudential from my perspective as an investor is its strong position in developing markets that could hopefully see fast growth in demand for its products. Some of those markets remain largely untapped.
But the past several years have seen uneven performance in Asian economies. That has cast some doubt on how smart Prudential’s plan is.
Revenues in the first half fell compared to the prior year period, albeit by only 1%. Meanwhile, profits after tax (on an International Financial Reporting Standards basis) crashed over four-fifths compared to the first half last year. Ouch.
A lot of that profit fall was pinned on short-term fluctuations in investment returns. But even aside from that, profits fell in some key markets. That included a 9% year-on-year decline in the Pru’s biggest market, Hong Kong. I see a risk that ongoing economic uncertainty in East Asia could eat into revenues and profits.
It was not all bad news. Singapore, already a large market, showed post-tax profits 27% higher than the same period last year. Still, the results show a business battling uncertain demand trends in key markets.
I also did not appreciate the company’s lack of self-awareness in its reporting. Its description of its “resilient performance in the first half” makes me wonder whether management is fully engaged with the reality of a business that saw revenues decline and profits crash. That is not my definition of resilience!
Still a lot to like here
Despite that, I am a long-term buyer of shares and on that basis I think the investment case for Prudential remains strong, especially at the current share price.
The interim dividend grew 9% and over the long term I see substantial room for further income growth as this is typically a very cash generative business. Prudential has identified financial services areas in which it has a strong reputation. It is targeting markets that have large numbers of potential customers and that in some cases continue to offer limited competition.
The Pru has been developing proprietary technologies that over time ought to bring down the cost of sales, hopefully helping profitability. Today the company affirmed its ongoing confidence in an ambitious target to deliver 15%-20% in compounded annual growth for new business profit and double-digit compounded annual growth in cash generation (both measured from a 2022 base).
I think the company has the foundation for an excellent long-term growth story. The current Prudential share price does not reflect that fully, in my view.
I continue to see it as a long-term bargain and plan to keep holding.
