When I think of life insurer Prudential (LSE: PRU) (NYSE: PUK.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.
1) Volatile cash flow
One way of getting to grips with the underlying strength of a company’s growth proposition is to check out its performance on cash generation. On that score, Prudential’s record is a little patchy:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Net cash from  operations (£m) | 108 | 1,948 | 1,738 | 705 | 1,324 |
| Net cash from  investing | (554) | (234) | (167) | (326) | (584) |
The firm’s activities generated less cash during 2013 than they did in 2010 and 2011. That’s not ideal when there is a growing dividend to support, as the cash the company brings in from its earning activities pays those cash dividends.
2) Bumpy profits
Revenue has been on a gentle rising trajectory for some time at Prudential. That’s a requirement of sustainable growth but the firm must convert sales into equally strong profits in the longer term if investors are to benefit. However, the operating-profit record is a bit up and down:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Operating profit  (£m) | 1,773 | 2,329 | 2,097 | 2,362 | 2,240 |
It seems that operating profit is struggling to make progress and it certainly isn’t keeping up with the firm’s soaring revenues. That’s problematic because it affects dividend cover from earnings and therefore threatens the firm’s rising-dividend policy:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Adjusted earnings  per share | 47.5p | 62p | 62.8p | 85.1p | 52.8p |
| Dividend per share | 19.85p | 23.85p | 25.19p | 29.19p | 33.57p |
| Earnings divided  by dividend | 2.4 | 2.6 | 2.5 | 2.9 | 1.6 |
With Prudential trading in the up-leg of a macro-economic recovery, trading conditions are as favourable as they can be right now, so I’ll be looking for solid progress on cash flow and profits going forward.
What now?
Prudential is trading well in Asia but it’s worth bearing in mind that the firm operates in a cyclical sector. It’s best to consider growth expectations within the frame of such cyclicality.