Up 40% in a Year—Still a Buy

10/11/2013 12:00 pm EST

Focus: INSURANCE

Even though this stock has enjoyed stellar success for the last five years, Harvey Jones of The Motley Fool UK still thinks there might be even more good news on the way.

I'm usually reluctant to invest in stocks on the back of a good run. My worry is that the party is over and I'll be left with the dirty dishes. That should put me off insurance giant Prudential (LN:PRU) (NY:PRU), which is up nearly 40% over the past 12 months. But I think it's still a buy. The last 12 months is no flash in the pan. Over five years, the Prudential share price is up a whopping 200%. Its recent eye-catching results included a 22% rise in first-half operating profits to 1.41bn, and an 18% rise in Asian operating profits to 512m. The days of double-digit GDP Chinese growth are probably over, Asia's emerging middle class will increasingly want to save for their future and protect their wealth, through pension, investment, and insurance products. Chief executive Tidjane Thiam said many in the West underestimate the region's "fantastic transformation," and predicts plenty more growth to come. Prudential has doubled its Asian profits in the last four years.

Ripens with age

Western growth rates may remain sluggish, but again, demographics may come to Prudential's rescue. Aging US and European populations, worried about shrinking state provision, will spend more of their money on pension plans and annuities. Prudential's US Jackson business is generating plenty of cash. On the downside, EU Solvency II regulations will put a burden on the business.

I am disappointed at Prudential's yield, which is currently a pesky 2.57%, well below the average life insurance sector yield of 4.5%. Aviva (LN:AV) and Legal&General (LN:LGGHPFA), by contrast, both yield a far more rosy 4.5%. But management has a progressive policy, as we saw with the recent 15.8% hike in the interim dividend to 9.73 per share. And it seems churlish to complain, given recent growth rates.

Prudential potential

Prudential's startling share price growth has slowed in recent months, largely due to the wider economic uncertainty. It isn't cheap, although I don't think it is too expensive either, given Prudential's prospects. It currently trades at 14.8 times earnings, slightly pricier than the FTSE 100 average of 14.65 times earnings.

Now could be a good entry point, if you're tempted to build-up a stake in the stock. Goldman Sachs and Bank of America have it nailed as a buy, with prices of 14.80 and 13.90 respectively, a decent premium on today's 11.73. Prudential has done pretty much everything right lately, and despite its strong share price growth, and that's why I also think it's still a buy.

Harvey owns shares in Aviva and Prudential. He doesn't own any other stock mentioned in this article.

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