Is Top-Scoring FTSE 100 Share Prudential Plc Still A Buy?

During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:

  • Dividend cover
  • Borrowings
  • Growth
  • Price to earnings
  • Outlook

Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Others scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).

Quality and value in harmony

However, the most promising investment opportunities scored well on both business-quality and value indicators.

In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting life insurer Prudential (LSE: PRU) (NYSE: PUK.US), which scored 18 out of 25 in July. 

Insurance revenue up, profits down

I thought an investment in Prudential might be a good idea back in July and, since then, the share price has risen about 11% to 1248p. The half-year results confirmed that the firm has been making further progress, with earned insurance premiums (revenue) up about 8% compared to a year ago.

However, earnings are down 59%. How can that be? Well, it’s because the life insurance activities made a loss, meaning an overall profit result depended on the performance of the firm’s investment operation, which turned in a 25% lower return than the year before.  

Investment-director post created

The company acknowledged the importance of its £405bn asset portfolio in August with the creation of, and first appointment to, the new role of Group Investment Director. The CEO reckons the firm’s expansion, and increasing global market volatility, makes the position necessary. As the investment arm is so important to Prudential, it’s hard to argue with the wisdom of the move.  

Prudential’s total-return potential

A forward P/E rating of 13 or so compares well to 18% earnings-growth expectations and a 2.7% dividend yield for 2014. Forecasters reckon that forward earnings will cover that dividend around 2.8 times.

Recent trading was down a bit, as the firm’s financial results rely on its investment performance. I’m inclined to drop my outlook score to a neutral three points, so my overall business-quality and value scores now look like this: dividend cover 4/5, borrowings 4/5, historic growth 2/5, P/E 4/5, and outlook 3/5, giving a total score of 17/25.

What now?

Prudential’s insurance operations are expanding nicely in Asia but, thanks to the investment arm, I think it takes a jolly decent bull-market in shares to delight holders here. In that respect, cyclicality plays a big part in the total-return outcome.

That's why I'm looking at companies with more stable operating economics, like the five with strong economic franchises and well-defended operating niches analysed in this well-researched Fool report.  

If you run your own due diligence and research system over these shares, you'll probably see why I'm enthusiastic about them. Each firm operates in a less cyclical environment than Prudential and they each deserve consideration by investors aiming to build wealth in the long run with a firm grip on protecting the downside.

To download the report click here.

> Kevin does not own shares in Prudential.