Why Prudential plc Will Be One Of 2013’s Winners

The year has been a bit of a resurgent one for the insurance sector in general.

And if perhaps not every one of its constituent companies has done well, Prudential (LSE: PRU) (NYSE: PUK.US) is at the head of the pack with a 44% rise to 1,244p since the start of 2013 — and in the same period, the FTSE 100 has gained only 13% to 6,666 points.

Prudential’s year is not just a one-off in the kind of turbulent life an insurer can lead. No, the price is up 95% since this time two years ago, and while the FTSE has put on just 50% over the past five years, Prudential shares have soared to a 270% rise.

How does it do it?

Prudential has been playing a neat trick on the market — it’s been growing its earnings per share (EPS) year-on-year, right through the credit crunch, and has been lifting its dividend steadily in tandem while keeping it well covered. Clever, huh?

The Pru may not offer one of the best dividends in the sector — it’s been ranging between 3% and 4% over the past few years, and now that the share price has climbed so impressively it’s on for a yield of only 2.5% for 2013. But last year’s dividend was more than 2.6 times covered by EPS, and cover of around that level has been fairly consistent.

And unlike some of the others in the insurance sector, Prudential didn’t get overstretched and didn’t have to slash its payouts.

Good value?

After such a performance, you might think the shares are on a lofty P/E rating. Well, analysts are forecasting a 3% rise in EPS this year, which would put the shares on a forward P/E multiple of 16. That’s above the FTSE’s long-term average of 14 and arguably toppy for an insurance company.

But as we approach the end of the year, the City is predicting an even better 2014 with an earnings rise of 18% penciled in. That would bring the P/E down to just over 13, and with the economic recovery starting to get a hold, albeit still a tentative one, I don’t think that’s too stretching at all.

But will Prudential match the expectations we have of it?

At the halfway stage to the end of June we saw a 22% rise in operating profit to £1,415m, an underlying free surplus generation of £1.5bn (up 11%), and an interim dividend boost of 15.8% to 9.73p per share.

Meeting targets

Back in 2010 Prudential set itself six “growth and cash” objectives to be achieved by the end of 2013, and at interim time this year chief executive Tidjane Thiam said the firm had already achieved four of them and was confident of achieving the remaining two by year-end.

And looking forward, Mr Thiam said that the firm’s strategy “positions Prudential to perform well through challenging economic conditions, with significant upside as the economic conditions improve“.

So, we have a company that’s been knocking out the profits and looks set to continue, and its share price has trounced the FTSE over the short and the long term.

That’s a winner!

And finally...

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> Alan does not own any shares mentioned in this article.