Let me ask you a question.
Would you be interested in a stock that currently sports the following:
Price to Earnings of 11
Forward Price to Earnings of 9.7
Price to Book of under 1
How about a payout ratio of under 30%, a dividend growth streak of 8 years, and a 10 year growth rate of over 14%?
Introducing this week's ex-dividend stock to watch: Prudential Financial (PRU)
A Little bit about the company
Prudential Financial, Inc., through its subsidiaries, provides insurance, investment management, and other financial products and services in the United States and internationally. The company primarily offers life insurance, annuities, retirement-related, mutual funds, and investment management products and services. Prudential Financial, Inc. was founded in 1875 and is headquartered in Newark, New Jersey. --Taken from www.finviz.com
There is a lot to like about PRU in terms of ratios. It currently is lower than the industry average in P/E, Forward P/E, Price-to-Book, and Price-to-Sales. In fact its price-to-book ratio is very low in terms of historical levels. It also sports a 3 year dividend growth of double that of the industry average and has been buying back shares over that same time period.
Prudential recently had a huge 3rd quarter beat which has kept the stock at a price that I believe is fair. The Dirty 30 valuation current values it at around $112 per share and as of writing this it was sitting at $110.46. Not much too bite off there but still a few crumbs to chew.
Year over year (YoY) income is up minimally, but the EPS have begun to increase again as the buybacks have decreased the diluted shares by almost 10 million. This is a strategy that is paying off while the dividend payout has been kept at low levels. Long term debt has been decreasing as well, down over $2 billion YoY.
In terms of asset management PRU has done a nice job increasing the total number of assets being managed, with an almost 15% gain in retail investors. Institutional assets have also increased during that time, although not to the extent of the retail investors.
There are a ton of things that you could look at when trying to knock down a stock but I always begin with the balance sheet and work my way through it. Here are a few of the biggest things that I found working through it.
First the short-term debt has almost tripled in the past year. This has primarily been in an increase in operating debt related to investment activity. Along with this the interest expense that PRU is paying has increased 7%.
Second, the insurance premium revenue has decreased by 13% YoY. Doesn't sound like much. How about in dollars terms where that equals almost a billion dollars. Yes that is with a "B" my friends. Now along with that the benefits decreased as well (10%), so don't get crazy. I am being very picky here with my bad list.
Finally we come to my biggest problem with PRU, the asset management.
"Wait wasn't the increase in asset management in the good section?"
Yes it was, but let me tell you something that concerns me. In the past year the asset management & investment operational income has increased a combine 16% or almost $600 million dollars. Why does that concern me? Because we are in a bull market that has retail investors and institutions flocking to invest more money into this apparent money printing machine. What happens when we get pull backs or interest rate hikes and people begin to put money back into cash, savings accounts, or bonds that require little in terms of fees and management? That is my concern.
In terms of the bad, I honestly am not that worried about PRU falling off a cliff or dropping drastically in price. That being said it has run up about 30% in the past year and cooling off seems to be a possibility in the near-term. Does that have me worried to invest in PRU?
Absolutely not! The company is sound and is one of the top life insurance companies in the known universe with over 5% market share. This is not a company that is going to get crushed if the markets take a massive hit.
Add to this a dividend growth streak that should soon make its way into double digits and an average growth of over 10% and I think that I am in love.
This stock goes ex-dividend on November 24th and it may just pay to jump on that train before it leaves payout station.