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The pros and cons of buying Prudential shares right now

It seems a very strange situation to me that a company may be forced to tell its customers that its rivals may be offering better prices, deals or services, than it does itself. This is, however, the situation UK insurers find themselves in and one that today sees Prudential (LSE: PRU) fined £24m for this “lack of transparency”.

This news is just the latest in a line of negative stories for Prudential in the past few months, most of which seem to focus around annuities and an attempted transfer of that business being turned down by the High Court. Naturally this news has led me to ask if it will affect the investment case for Prudential.

Fines and court rulings

The £24m fine the company suffered Monday comes about because, according to the FCA, between 2008 and 2017 Prudential failed to tell some of its customers who were retiring and looking to open an annuity, that they could have received better rates with its competitors.

Strange perhaps, but the rules are the rules, and Prudential has been fined £24m. Luckily for the company, both the fine and the decision are not likely to impact it in the long term. The money is not too large, and the rule is, of course, one the firm has been following more closely. This lack of trouble is reflected in its share price, which as I write this is very slightly higher for the day.

Perhaps of more fundamental concern to the company, however, is the High Court ruling in August that halted a £12bn annuity transfer deal that was set to see Prudential transfer some 400,000 retirement incomes to insurer Rothesay Life. The market for annuity transfers is fairly new, and this court ruling may have a significant impact on the industry.

Last week the two companies confirmed they would be appealing the decision – giving some indication of how important they see the ability to undertake such transfers – saying the High Court’s judgment “contains material errors of law and should therefore be reconsidered”.

The negative ruling in August helped bring about a 24% drop in the share price for the month, though this has now managed to recover a little ground. Is this dip perhaps a buying opportunity?

The pros

Aside from this latest news, there are a number of positives for Prudential that could interest investors. Firstly from an income perspective, the current share price means an indicated gross dividend yield of about 3.4%, not the highest level on the FTSE 100 but nice enough for a fairly stable blue-chip.

Importantly, the company has produced dividend growth of almost 7.5% per year over the past five years, meaning on the passive income front, one would expect a nice stream going forward.

As it stands, the company has a forward looking P/E of just over 9, making it very cheap in both the industry and the broader market. Though revenue was down in 2018, the profit margin was up, driven in a large way though success in Asia.

These latest troubles may indeed be offering a dip-buying opportunity, though personally I feel there may be more room on the downside before it becomes attractive enough for me to buy.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.