The Contrary Investment Case: 3 Reasons To Avoid Prudential plc


In recent days I have looked at why I believe Prudential (LSE: PRU) (NYSE: PUK.US) looks set to surge.

But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, weigh on Prudential’s investment appeal.

Home markets remain a headache

Prudential has made no secret of its belief that emerging territories are the keystone to future growth, the insurer having witnessed levels of business from these regions — and more specifically Asia — rocket in recent times.

But although the company plans to hike its exposure to developing markets through further M&A activity, dragging performance in the UK remains a concern. The business saw annual premium equivalent (APE) sales at home crumble 12% during January-September, falling to £540m, mainly due to lower sales of bulk annuities. Prudential currently sources 17% of group revenues from British customers.

Dividends lack pulling power

With Prudential anticipated to maintain its multi-year record of solid annual earnings growth over the medium term, City brokers expect this to translate into bumper dividend expansion during the period.

Analysts expect the firm to increase the dividend 8.9% to 31.8p per share for 2013 — results for which are due on Wednesday, March 12 — and an additional 8.8% advance is predicted this year to 34.6p. The dividend is expected to rise a further 7.8% in 2015 to 37.3p.

Still, these figures create yields well below the 3.1% FTSE 100 prospective average, not to mention the chunky forward reading of 4.5% for the entire life insurance sector. Indeed, Prudential carries meagre yields of 2.6% and 2.8% for 2014 and 2015 correspondingly.

A poor value growth pick?

On top of this, Prudential could also be accused of offering scant value for money for those seeking decent growth at reasonable value. The insurance giant is expected to punch earnings expansion of 21% and 11% for 2014 and 2015 correspondingly, in turn creating P/E multiples of 14.5 and 13.1.

By comparison, big-cap rivals Legal & General and Aviva wield lower P/E multiples throughout this period, and carry readings of 13.8 and 9.8 respectively for 2014. Although both these companies are also expected to post robust earnings expansion this year and next, investors have to weigh up whether Prudential’s better track record in recent years justifies its higher cost.

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> Royston does not own shares in any of the companies mentioned in this article.