Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at Prudential (LSE: PRU) (NYSE: PUK.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Emerging markets keep delivering…
Prudential has long identified emerging markets across Asia as critical in driving future growth. And the firm’s interims this month revealed that its activities in these areas were pivotal in driving group new business profit higher during July-September — profits here rose 20% in the period to £990m, a result that pushed Prudential’s total new business profit 12% higher to £1.95bn.
The company is ramping up its operations in these regions, where it believes a “fast-growing and increasingly wealthy middle class, a positive demography, rising urbanisation, high savings rates, strong demand for accumulation and protection products and low insurance penetration” is ready to drive long-term earnings.
… but UK continues dragging
Signs of near-term economic cooling in these areas are undoubtedly a concern for firms such as Prudential, even if the long-term fundamental case for strong GDP growth in these geographies remain robust.
Of more concern at present, however, is continued performance weakness at home. Indeed, Prudential noted that new business profits from the UK fell 10% during July-September to £204m, where fresh regulatory changes exacerbated the effect of wider difficulties in the market. Still, the firm’s US division saw profits advance 11% to £756m, offsetting concerns in its other Western market.
Dividends not up to scratch
But although Prudential keeps posting excellent operational improvements, the business is expected to continue providing below-par dividends to investors.
True, the company’s progressive dividend policy has resulted in chunky year-on-year payout increases in recent times, and last year’s full-year dividend was listed 16% from 2011 levels to 29.2p per share. And although brokers anticipate payouts to rise again this year and next, to 31.5p and 33.8p, these provide yields of just 2.5% and 2.7% respectively, far below the life insurance sector’s prospective average of 4.6%.
Relentless growth expected to head higher
Still, Prudential has proven itself as a top-level pick for investors seeking chunky earnings growth year after year, and the City’s analysts expect the company’s expansion to keep delivering well into the future.
Indeed, forecasters anticipate earnings per share to advance 3% in the current year, to 79.3p, before accelerating strongly next year — growth of 18% is widely anticipated, to 94p. Prudential currently trades at a premium to the rest of the life insurance sector, carrying a prospective P/E rating of 16 versus a 14.1 average for its rivals.
An exceptional share selection
But in my opinion the company’s ability to punch regular earnings growth fully justifies its more expensive price rating. And with business in emerging markets continuing to ignite, I expect Prudential to continue to enjoy stunning growth well into the future.