Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Prudential (LSE: PRU) (NYSE: PUK.US).
What is the sustainable competitive advantage?
In the highly competitive market for life insurance and financial services, bigger is better. Unfortunately, compared to its main London -isted peers, Aviva and Legal & General, Prudential lacks this key competitive advantage.
In particular, at the end of 2012, Prudential had $500 billion in assets under management. In comparison, Aviva and Legal & General had assets under management of $513 billion and $563 billion respectively.
Having said that, despite Prudential’s smaller size, the company’s experience and recent growth have led investors to place a premium on the company.
Indeed, Prudential’s current market capitalisation of around £30 billion is almost double that of its peers mentioned above.
Moreover, Prudential’s brand alone is valued at around $4.5 billion, double that of peer Legal & General.
Nonetheless, competition in the life insurance and financial services market is aggressive and Prudential’s lack of a sustainable competitive advantage means the firm cannot set the prices of its products and services to control profit margins.
For example, during 2012, Prudential’s operating profit margin was around the same as its peers above.
However, the firm does have a large presence in Asia, where it has been operating since the mid-90s and this is by far the company’s biggest competitive advantage over its peers.
What’s more, Prudential has been around since 1848, so the company has plenty of history behind it, a great trait in a buy and forget share.
Company’s long term outlook?
Prudential’s long-term outlook seems promising. Ageing populations both here in the UK and within the US mean that demand for Prudential’s products and services is only going to rise over the long term.
Additionally, Prudential will benefit from both ageing populations and growing wealth in Asia as life insurance becomes more affordable.
Having said that, Prudential is likely to face rising competition in Asia as many of its peers seek to capitalise on the region’s rising wealth and population growth.
Still, with a well-established existing position in the market, Prudential has ‘first-mover’ advantage and the company’s experience in the market should keep it ahead of the game.
Even though its lacks a strong competitive advantage over its peers, Prudential operates in an extremely defensive industry that is only likely to see rising demand over the long term.
So overall, I rate Prudential as a very good share to buy and forget.
Rupert does not own any share mentioned in this article.