When a stock has been on a blistering run, investors have to ask whether it is going to run out of puff. Prudential (LSE: PRU) (NYSE: PUK.US) has shown plenty of staying power, however, and I reckon there is plenty more outperformance to come.
Prudential hasn’t lost its appetite for growth, with chief executive Tidjane Thiam setting out its “aggressive” emerging markets strategy earlier this week. The Asian middle class is rising, and Prudential wants to continue rising with them. Thiam has set the Pru three new objectives to achieve by the end of 2017, including doubling Asian cash generation to more than £1 billion, and delivering compound annual growth of at least 15% in life and asset management profits. He also wants the group to generate £10 billion of cash a year by the end of 2017, almost one-third of Prudential’s current £33 billion market cap.
Demographic delights
Thiam has a good track record in hitting his targets. He claims to have met five of the six objectives he set for Prudential in 2010, one of which is doubling profits in Asia. The final one will shortly follow. Rapid GDP growth, a youthful population and low insurance penetration make Asia a juicy target, but Prudential is also pushing into Cambodia, Myanmar, Poland and Ghana. Saudi Arabia could be next. US baby boomers are slipping into retirement, while in the UK, people are waking up to the fact that they need to start saving or work to 70. Everywhere you look, demographics are on Prudential’s side. Better still, it has largely avoided troubled Europe. So it’s lucky as well.
Pacesetter
Prudential has momentum, having grown a stunning 252% in the last five years, and is determined to keep going. Inevitably, given recent success, it isn’t cheap, trading at 16.8 times earnings. That compares to an average of 13.25 times for the life insurance sector. Its yield is disappointing, at 2.27%, against Aviva‘s 4.4% and Legal and General‘s 3.7%, but that’s the price you pay for rampant share price growth. Aviva, for example, grew just 8% over the last five years. Dividend policy is progressive, however, with management recently hiking the interim dividend 15.8% to 9.73p per share.Â
After a sluggish 2% earnings per share (EPS) growth this year, Prudential is forecast to deliver a pacey 21% EPS growth in 2014, lifting the yield to 2.7%. Prudential should continue to lead the field in 2014. If rumours are correct, and it is preparing to float off parts of its businesses, it could race clear.