Is Prudential plc A Super Income Stock?

Shareholders in Prudential (LSE: PRU) (NYSE: PUK.US) have enjoyed a prosperous year, with shares increasing from £11.55 one year ago to the current share price of £13.50. That’s a gain of 17%, which is well ahead of the FTSE 100’s flat performance over the same period.

In addition, Prudential has paid a dividend of over £0.30 per share over that period and has increased dividends per share at a brisk pace in recent years. However, given the aforementioned price rises, can it still be classed as a super income stock?

With a yield of 2.5%, Prudential doesn’t appear to be a particularly attractive income stock at first glance. This doesn’t compare especially well to the FTSE 100, which yields around 3.5%. It is, however, ahead of the typical high-street savings account and, more importantly, beats the current level of inflation.

prudentialHowever, the yield is not the whole story. That’s because Prudential is forecast to increase dividends per share at an impressive pace over the next two years. As mentioned, Prudential has delivered strong dividend growth in the past and this is set to continue in future, as dividends per share are forecast to grow at an annualised rate of around 6% over the next two years.

Furthermore, there seems to be scope to pay a higher proportion of earnings out as a dividend. For instance, in 2013 Prudential paid out just over 63% of net profit as a dividend. Certainly, a business such as Prudential has ambitious growth targets and undoubtedly needs to reinvest profit within the business to achieve its goals. However, it has the potential to pay out a greater proportion of profits as a dividend in future while still reinvesting sufficient amounts so as to post strong growth numbers. Doing so would further improve the dividend yield.

So, while at first glance Prudential may not appear to be a super income stock, delving beneath the surface highlights two key points. Firstly, dividends per share are set to grow at a relatively high rate and, secondly, Prudential has the opportunity to pay out a greater proportion of profits as dividends in future. Both of these facets combine to make Prudential a super income stock — especially for investors who take a medium to long term view.

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Peter does not own shares in Prudential.