Why Prudential plc Should Be A Winner This Year

The insurance sector is looking quite a bit stronger now that it was a year or two ago, and there’s a fair bit of optimism in the air regarding future performance. But past performance has been quite varied amongst individual companies, and there’s a wide spread of dividends too.

Today I’m taking a look at Prudential (LSE: PRU) (NYSE: PUK.US), and I’m liking what I see.

Here’s a quick look at the Pru’s past five years’ earnings and dividend figures, with forecasts for 2013 and the next two years:

Dec EPS Change P/E Dividend Change Yield Cover
2008 39.9p +20% 10.4 18.90p —  4.5% 2.1x
2009 47.5p +19% 13.5 19.85p +5.0% 3.1% 2.4x
2010 62.0p +30% 10.8 23.85p +20% 3.6% 2.6x
2011 62.8p +1% 10.2 25.19p +5.6% 3.9% 2.5x
2012 76.8p +22% 11.3 29.19p +16% 3.4% 2.6x
2013* 77.6p +1% 17.3 31.72p +8.7% 2.3% 2.4x
2014* 94.9p +22% 14.2 34.49p +8.7% 2.5% 2.8x
2015* 104p +10% 12.9 37.01p +7.3% 2.7% 2.8x

* forecast

Holding up nicely

Unlike a number of its life insurance competitors, Prudential managed to keep earnings per share rising right through the recession — Aviva, for example, suffered from four years of falling earnings and had to slash its dividends, although it looks to be on the mend.

Now, Prudential doesn’t pay such high dividend yields as others in the first place, because Prudential is, well, more prudent with its dividend cover — it has maintained its cover at well above two times, while Aviva’s stood at only 1.9 times even before those few bad years. So even if Prudential did suffer a downturn, it would be less likely to have to cut its annual payment

Lower dividends

Of course, the downside of that is that Prudential’s dividend yields are lower — even after the recent rebasing, Aviva is still set to pay around 3.6% for the year just ended, against Prudential’s much lower 2.3%.

But against that, we’ve seen a share price rise of around 45% from Prudential over the past 12 months, versus Aviva’s 30% — both very nice results, but Prudential’s is significantly better overall.

And if Prudential should keep retaining such a relatively large proportion of growing earnings, I really can see the share price increasing further. That high P/E of 17 for December 2013 does concern me a little, but if those forecasts for the next two years are close to the mark and drop the multiple to 13 for 2015, today’s valuation should be justified.

The year just gone

So how is Prudential shaping up ahead of those 2013 results?

The firm’s third-quarter update told us that growth is being nicely driven by Asian performance at the moment, with a 20% year-to-date growth in new business to £990m. About 30% of Prudential’s profits come from Asia, and strong economic growth coupled with increasingly wealthy populations in the region are inevitably going to increase the demand for life insurance and for investment services.

Diversification of the Pru’s product portfolio in the US is helping drive profits too, and the company saw an 11% rise in business profit to £756m. Funds under management are up, by 19% to a record £124bn. And even the tough UK market is seeing “resilient” results.

Balance sheet

Looking to the future, the firm says that maintaining a strong balance sheet is “absolutely key to meeting our commitments to our 25 million customers around the world“, and that just adds to my confidence. Prudential is a very well managed company, and I can see many more years of rewards for shareholders.

Verdict: A safe bet for 2014!

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> Alan does not own any shares in Prudential or Aviva.