Why Prudential plc Should Be A Candidate For Your 2014 ISA

prudentialOver the short term, insurance can be a risky investment due to the very nature of the business, so I wouldn’t recommend it for those looking to get rich quick.

But over decades, the business takes the hits (like the recession we’ve just had) and comes up trumps. In fact, the best of them barely flinch during economic hard times — like Prudential (LSE: PRU), whose earnings and dividends have just kept on rising.

Here’s a look at how well it’s been doing:

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* 78.2p +2% 17.3 31.82p +9.0% 2.3% 2.5x
2014* 94.6p +21% 14.3 34.60p +8.7% 2.6% 2.7x
2015* 104.6p +11% 13.0 32.27p +9.3% 2.8% 3.2x

* forecast

Now that’s a pretty nice track record, with steadily-growing earnings per share (EPS) and dividends.

Prudential means careful

But what I really like about it is the Pru’s conservative nature when it comes to flashing the cash — during years of strong EPS growth, it has been lifting its dividend payouts proportionately less and has been keeping its cover high. This suggests that, should we see a few slower years, there’ll still be plenty of cash to keep the dividends flowing without dropping the cover too low.

So, while we might not be looking at the highest dividend in the sector, I reckon we’re seeing one of the most reliable.

And that, for me, is a key strength when it comes to ISA investing. I think that the annual allowance — to be raised to £11,760 this April — is best used on the kind of shares that you can just forget about for 20 years or more, and which will accumulate a solid sum to go in your pension pot.

Income plus growth

And, of course, good earnings growth coupled with a cautious dividend policy very often adds up to nice capital appreciation too — over the past 12 months, Prudential shares have climbed 35% to 1,334p.

Over five years the price is up around 450% compared to a mere doubling for the FTSE 100, and going back 10 years to even out the recession hit, we see a gain of 160% for Prudential against the FTSE’s 50%.

Now, we’re clearly not going to get 35% per year every year. But if Pru shares should appreciate at, say, 5% per year and we get a steady dividend yield of 3%, how much would that come to if the cash is reinvested each year?

It sure beats cash

It would turn an initial £1,000 into nearly £4,700 after 20 years — compared to around £1,300 from a typical cash ISA.

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Alan does not own any shares in Prudential.