Does Prudential plc Pass My Triple Yield Test?


Like most private investors, I drip-feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 is up 92% on its March 2009 low, and the wider market is no longer cheap. It’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over Prudential (LSE: PRU) (NYSE: PUK.US), to see if it might fit the bill.

The triple-yield test

Today’s low interest rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my portfolio, I like to look at three key trailing yield figures –the dividend, earnings and free cash flow yields. I call this my triple yield test:

Prudential Value
Current share price 1,331p
Dividend yield 2.3%
Earnings yield 5.1%
Free cash flow yield 2.0%
FTSE 100 average dividend yield 2.8%
FTSE 100 earnings yield 5.7%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.7%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. Prudential’s earnings yield of 5.1% corresponds to a fairly ambitious P/E rating of 19.6, which is above the FTSE 100 average of 17.5, and suggests to me that the firm is already quite fully valued.

Prudential’s costly price tag is confirmed by a look at its dividend yield, which is a below-average 2.3%, and is not quite covered by the firm’s 2.0% cash flow yield. This means that Prudential may have to dip into its cash reserves or borrowings to fully fund this year’s dividend payout.

Is Prudential a buy?

Analysts are pencilling in full-year 2013 earnings of 77.2 per share for Prudential, placing it on a forecast P/E of 17.2, which is in-line with the wider market. The firm’s total dividend is expected to rise by 8% to 31.6p, giving a prospective yield of 2.4%.

Although I’m attracted to Prudential’s Asian exposure and long-term growth potential, in my view, the firm’s likely growth is already in its share price. I am not tempted by Prudential shares at the moment, and rate them as a hold, as although they are too expensive for me, I am confident they will deliver long-term growth.

However, I may be being too cautious: Prudential reported 20% rise in new business profit in Asia during the third quarter of 2013, and analysts are forecasting a remarkable 23% increase in earnings per share for 2015.

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> Roland does not own shares in Prudential.