Is Prudential plc Burned Out?

Prudential (LSE: PRU) (NYSE: PUK.US) has been on fire in recent years. It has more than doubled my money since I bought it in October 2009. Over five years, it is up nearly 300%. But nothing lasts for ever, and the question I’ve been asking myself lately is this: is Prudential burned out?

Investing, like life, goes in cycles. Few stocks rise in a straight line, year after year. Yet Prudential has been upswing all the way. When you’ve hit an all-time high, as it did last month after announcing its bold new African expansion plans, where do you go next?

prudentialDeath By Zombie 

Despite posting a fiery set of full-year results one month, Prudential has since cooled. Like fellow FTSE 100 insurers Aviva and Legal & General Group, it was hit by last week’s announcement by the Financial Conduct Authority that it would investigate £150 billion worth of ‘zombie’ life policies sold between 1970 and 2000. That has ended up doing more damage to the furiously back-pedalling regulator, which has been attacked for creating a “false market” in life company shares by overstating the scale of its investigation. The Pru can handle the zombie threat.

Chancellor George Osborne’s decision to liberate pension savers from the obligation to buy an annuity at retirement is a bigger long-term concern, given predictions that the annuity market, dominated by the big life companies, could shrink by 75% from next April. 

In the short run, demand may for insurance company retirement products may increase, as pensioners work out what to do with their new-found liberty. But I doubt that will compensate for the lost income stream from annuity sales, leaving less fuel for the Prudential fire.

Foreign Affairs

The Prudential story isn’t about the UK: it is primarily about Asia, where it has been more successful than any other UK insurer in targeting the emerging middle class. The Pru now generates half its sales from Asia, and has ambitious plans to generate up to £1.1 billion in cash from the region by 2017. Asia isn’t a one-way bet, however. If the Chinese credit and property bubble bursts, other countries in the region will also go pop, led by Hong Kong. The good news is priced into the stock. The bad news isn’t.

I am intrigued by its African adventure, given that I’m underexposed to the continent. Prudential is setting course for Ghana, with Kenya and Tanzania also likely to figure on its itinerary, along with travelling companion Standard Chartered, which already has a strong presence in Africa. If it can repeat its stirring exploits in Asia, investors should reap the rewards. Prudential’s often-overlooked Jackson business in the US has also performed well.

Triple-A Rated Reason To Invest

Prudential does have its doubters. JP Morgan is underweight, with a target price of just 1038p, well below today’s 1332p. I have been tempted to bank my substantial profits, especially with the stock now trading at a whopping 25 times earnings, and yielding just 2.5%.

But I can still see a triple-A reason to continue holding this stock: “Africa, Asia and the Ageing global population.” Prudential can’t be called burned-out given these three hot opportunities, although it may be more of a slow burner from here.

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Harvey Jones owns shares in Prudential. The Motley Fool owns shares in Standard Chartered.