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How FTSE 100 growth champion Prudential could help you retire early

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One of the problems with large-cap stocks is that their size tends to mean earnings growth is limited. 

As a result, small-caps are usually better growth investments. Unfortunately, small-cap stocks also tend to be riskier. So if you are looking for growth, you usually have to go for a trade-off between growth and risk.

However, there’s one FTSE 100 company that I believe offers the perfect combination of both growth and limited risk.

Beating the market 

Prudential (LSE: PRU) is one of the FTSE 100’s top growth stocks. Over the past six years, revenue has grown at a compound annual rate of just under 10% and City analysts are expecting net profit to nearly double during the next two years. With growth booming, shares in the international insurance group have risen 47% since 2013, outperforming the FTSE 100 by 28% over the same period, excluding dividends.

Prudential’s Asian business has been almost entirely responsible for its growth since 2013, as today’s results show. For the first half of 2018, Asia new business profit rose 11%, and operating profit gained 14% on a constant currency basis. Meanwhile, operating profit in the UK and Europe ticked higher by just 4%. Overall, the life insurer reported a 9% rise in first-half operating profit to £2.4bn.

With Asia booming and Europe struggling, Prudential has become a two-speed business. The market is valuing the whole group based on its sluggish European operations. For example, the shares currently trade at a forward P/E of 11, a small discount to the rest of the UK insurance sector. I believe the shares deserve at least a mid-teens earnings multiple based on current growth expectations. 

In an attempt to unlock value, in March Prudential announced that it would separate its UK operation — called M&G Prudential — from the rest of the group, Expected to complete in 2019 or 2020, management believes this split will allow the business to meet customer demands better. Investors should also benefit. With earnings growing at a double-digit rate, the Asian business will undoubtedly attract a much higher valuation than it does today.

As the company continues with its de-merger plans, it may be time to buy the shares ahead of the transaction.

Returning to growth 

If Prudential isn’t for you, then Standard Chartered (LSE: STAN) might be a better buy. It hit the headlines for all the wrong reasons several years ago when it turned out that the group’s aggressive expansion into emerging markets had been completed at the expense of quality. Losses followed as the bank wrote off hundreds of millions of dollars in loans to customers. 

The business has now stabilised and is in recovery mode. After reporting a loss in 2015 and 2016, this year, analysts are expecting a $2.5bn profit, equivalent to 57p per share. 

Based on these forecasts, the stock is trading at a relatively attractive earnings multiple of 12.2. The stock is also trading at a deep discount to book value, estimated at 1,150p. The City believes the bank will achieve earnings growth of 18% in 2019, putting it back where it was before losses started to build up in 2014/2015. 

If all goes to plan, analysts also believe the shares could support a dividend yield of 3.5% next year. Put simply, this is another FTSE 100 growth stock that I think deserves further research.

Under-The-Radar Investment

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Rupert Hargreaves owns shares in Prudential. The Motley Fool UK has recommended Prudential and Standard Chartered. 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.