Prudential: Prudent Pick for Growth & Income

10/14/2016 7:00 am EST


Chloe Jensen

Chief Analyst, Cabot Dividend Investor

This well-known, 140-year-old financial services company is based in Newark, New Jersey and has long been a giant in life insurance, states Chloe Lutts Jensen, editor of Cabot Dividend Investor.

Prudential Financial (PRU) -- still the second-largest life insurer in the US -- now derives the majority of its revenues from its asset management, retirement solutions and international insurance divisions.

The company’s international division operates in Asia, Europe and Latin America, with Japan being its largest market.

Prudential’s three businesses work together well; over half of the asset management division’s assets under management are funds from Prudential’s insurance business or retirement accounts.

This synergy helped insulate Prudential from the significant withdrawals experienced by other asset managers this year.

But while Prudential’s strength in fixed income was an asset this year, it’s been a liability since the Fed started its zero interest rate policy nearly eight years ago.

Low interest rates reduce Prudential’s returns from its massive fixed income holdings, and the insurer is struggling with record low rates. As a result, Prudential has missed earnings estimates in each of the last four quarters.

Management is responding with steps to mitigate the effect of low rates, reduce the volatility of earnings and improve the transparency of their business.

Earnings per share are still expected to contract this year, but analysts expect between 10% and 20% EPS growth in 2017, followed by 9% growth per year on average over the next five years.

The dividend was cut in half in 2008, but management has increased it every year since then. Over the past five years, annual dividend increases have averaged 14%.

PRU’s P/E of 8.3 and forward P/E of 7.8 are both cheap, and the stock’s 3.5% yield is high for the industry — and for a stock with this much capital appreciation potential.

We’ll be adding PRU to the Dividend Growth Tier of our portfolio; investors looking for reasonably priced dividend growth with capital appreciation potential can do the same.

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By Chloe Lutts Jensen, Editor of Cabot Dividend Investor

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