For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at Life insurer Prudential (LSE: PRU) (NYSE: PUK.US).
Track record
With the shares at 1322p, Prudential’s market cap. is £33,772 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 18,993 | 20,299 | 24,568 | 25,706 | 29,910 |
| Net cash from operations (£m) | 1,144 | 108 | 1,948 | 1,738 | 446 |
| Adjusted earnings per share | 39.9p | 47.5p | 62p | 62.8p | 76.8p |
| Dividend per share | 18.9p | 19.85p | 23.85p | 25.19p | 29.19p |
1) Prospects
Buying Prudential shares at the beginning of 2009, when they were around 200p, now looks like an astute move with the shares currently at about 1,322p. Such is the power of investing on the up-leg of a cyclic recovery. But what about 2014 and beyond? Is that strong share-price momentum set to continue? Almost certainly not, I’d say.
True, the firm’s third-quarter statement revealed double-digit profit growth both in Asia and the US, but now the shares have recovered from their cyclical lows and then some, growth alone is what’s going to drive the share price. The directors reckon that Prudential’s Asian activities offer the greatest growth potential and, in 2012, around 32% of pre-tax profit came from Asia. The mature markets of the UK and the US delivered 36% and 32% of pre-tax profit respectively. We’ll see how the Asian market is progressing with the full-year results due in March.
2) Risks
In 2012, around 43% of Prudential’s revenue came from the firm’s investment return. So when the financial markets take a dive, so does Prudential’s bottom-line profit and, of course, its share price.
The inherent cyclicality of the firm’s business is therefore a risk factor. The market will be looking towards the next cyclical down-leg, although when that will arrive is anybody’s guess, and I’d expect P/E compression to offset some of Prudential’s forward share-price momentum even if profits continue to rise.
3) Valuation
The forward P/E rating is running at around 13 for 2015 with those earnings expected to cover a dividend payout about 2.8 times. At the current share-price level, the forward dividend yield is about 2.8 too.
That looks like a full and fair valuation, and no obvious bargain.
What now?
Prudential shares look less attractive now than they did. Financial-type businesses like this tend to show their biggest share-price gains early in the macro-economic cycle. Prudential’s business is growing, but the inherent cyclicality of the business adds an extra layer of investing complexity, particularly as the macro cycle matures.