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Why I plan to buy and hold Prudential plc for the rest of my life

I have been raving about insurer Prudential (LSE: PRU) for years, yet it remains one of the Fool’s more under-appreciated stocks, although that is starting to change. Private investors are waking up to its prospects, a little too late maybe, but there you go.

Asian tiger

The £47.32bn London-listed insurer is admired for its growth potential in Asia. The rising Asian middle classes cannot rely on the state to underpin their retirement, or give them sick pay if they fall ill, so are reliant on private suppliers such as Prudential for pensions and protection. The result? Its share price is up 32% over the past 12 months, and 130% over five years.

Prudential published first half 2017 results today, with next to no impact on the share price. Markets were expecting a positive set of numbers, and that is what they have got. Group operating profit rose 5% to £2.36bn, or 15% at actual exchange rates. Asia continues to lead the way, with business profit up 18% to £1.o9bn (33% at actual exchange rates).

Home comforts

US life insurance operating profit rose 7% to £1.08bn, while UK life retail sales jumped 22% and PruFund sales rose 29%, showing progress on the home front. Prudential’s fund management M&G continues to thrive, with first-half external asset management net inflows totalling £7.2bn. The group now plans to combine M&G with Prudential UK & Europe.

Group chief executive Mike Wells hailed the firm’s “successful strategy, innovative products and strong execution” and picked out the double-digit growth in its Asian business as a highlight. We have achieved our objective of generating over £10bn of Group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early and remain on track to achieve the remaining Asia-focused objectives by the end of this year.”

Cry pension freedom

The man from the Pru’s decision to target Asia’s dynamic economies, fast-growing middle class and under-penetrated markets” is paying off, as expected, but I am also pleased to see strong growth in both the US and the UK, where customers are at a later point in the savings cycle, with many using their savings pots to buy annuities. Prudential appears to have survived George Osborne’s UK pension freedom reforms in solid enough shape, despite the shock to annuity sales. 

The market response has been to shrug. It already knew how good Prudential was. Or maybe investors are holding their breath, seeing the merger of M&G Prudential UK & Europe as prelude to a sale. Offloading the slower-growing domestic business could turbocharge the firm’s share price.

True to Pru

Prudential still looks cheap, as measured by the price/earnings ratio of a forecast 13 times earnings. The forecast yield is 2.6%, below the FTSE 100 average of around 3.7%, but covered three times there is plenty of great scope for progression. Management delivered today, with the 2017 first interim dividend hiked an inflation-busting 12% to 14.5p per share.

City analysts reckon Prudential’s earnings per share will rise 8% in 2017 and 5% in 2018. Revenues should keep climbing, the cash flowing and profits rising, while the company also has stronger financial underpinnings, with its Group Solvency II surplus up 3% to an estimated at £12.9bn, equivalent to a ratio of 202%. That sounds like the formula for a solid and secure retirement income. The man from the Pru can keep knocking on my door.

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Harvey Jones owns shares of Prudential. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.