Prudential Plc’s 2 Greatest Weaknesses

When I think of life insurer Prudential (LSE: PRU) (NYSE: PUK.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.

1) Volatile cash flow

One way of getting to grips with the underlying strength of a company’s growth proposition is to check out its performance on cash generation. On that score, Prudential’s record is a little patchy:

Year to December 2009 2010 2011 2012 2013
Net cash from   operations (£m) 108 1,948 1,738 705 1,324
Net cash from   investing (554) (234) (167) (326) (584)

The firm’s activities generated less cash during 2013 than they did in 2010 and 2011. That’s not ideal when there is a growing dividend to support, as the cash the company brings in from its earning activities pays those cash dividends.

2) Bumpy profits

Revenue has been on a gentle rising trajectory for some time at Prudential. That’s a requirement of sustainable growth but the firm must convert sales into equally strong profits in the longer term if investors are to benefit. However, the operating-profit record is a bit up and down:

Year to December 2009 2010 2011 2012 2013
Operating profit   (£m) 1,773 2,329 2,097 2,362 2,240

It seems that operating profit is struggling to make progress and it certainly isn’t keeping up with the firm’s soaring revenues. That’s problematic because it affects dividend cover from earnings and therefore threatens the firm’s rising-dividend policy:

Year to December 2009 2010 2011 2012 2013
Adjusted earnings   per share 47.5p 62p 62.8p 85.1p 52.8p
Dividend per share 19.85p 23.85p 25.19p 29.19p 33.57p
Earnings divided   by dividend 2.4 2.6 2.5 2.9 1.6

With Prudential trading in the up-leg of a macro-economic recovery, trading conditions are as favourable as they can be right now, so I’ll be looking for solid progress on cash flow and profits going forward.

prudentialWhat now?

Prudential is trading well in Asia but it’s worth bearing in mind that the firm operates in a cyclical sector. It’s best to consider growth expectations within the frame of such cyclicality.

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Kevin does not own shares in Prudential.