While many UK life assurers are still reeling from the Budget day decision to scrap the compulsory purchase of annuities, Prudential (PRU) can afford to be relaxed. That's because - unlike its UK-listed rivals - Prudential earns most of its profit in Asia's fast-growth markets and the solidly performing US. So even though the company's UK business can't sidestep the fallout from pension reform, its exposure is modest. Moreover, a big presence in life markets that are rather less mature than the UK's gives Prudential a long-term growth profile that its UK-focused peers will struggle to match, leaving the shares - trading at only a small premium to those of its rivals - set for more growth-driven upside.
- Well protected from UK annuity pressures
- Big presence in fast-growth Asia
- Robust US performance
- UK business remains resilient
- Dividend yield is nothing special
- Foreign exchange headwinds
True, Prudential's experience in Asia hasn't always been positive. The company's attempt to scale up its presence there with 2010's bungled bid for AIG's Asian unit is a good example. But chief executive Tidjane Thiam, who had been at the helm for less than a year after having to abandon that deal, didn't give up on Asia. By using the cash generated from the mature UK operation to support Asian expansion, Mr Thiam saw the potential for rapid organic growth and lost no time in setting ambitious targets for Asia. Significantly, he planned to double operating profit from Asia between 2009 and 2013.
That target was actually achieved a year early and the Asian growth story - driven by an Asian middle class that's already larger than the entire EU - shows no signs of slowing, despite some broad-brush economic concerns for the region. Indeed, Prudential's third-quarter figures last month revealed Asia as the group's biggest contributor to new business profit. In constant-currency terms Asian new business profit in the first nine months of the year rose 15 per cent year on year to £775m, representing more than half of the group's total, and Asian new business sales rose 14 per cent. The Hong Kong business is growing especially rapidly, with third-quarter new business sales there up 36 per cent - significantly reflecting strong demand from customers in mainland China.
But Prudential isn't just an Asian story - the US Jackson National Life business is bounding ahead, too. Reflecting strong demand from America's legion of retiring baby-boomers, US new business sales in the nine months to end-September rose 11 per cent year on year (in constant currency terms) and new business profit here jumped 16 per cent to £530m. Even the UK arm is making progress. Sure, annuity upheaval did see UK individual annuity sales slump 47 per cent in the nine months to end-September. But, overall, UK new business sales rose 20 per cent after a number of new bulk annuity deals more than offset weakness on the retail side. So the UK's contribution to new business profit rose 28 per cent to £209m.
PRUDENTIAL (PRU) | ||||
---|---|---|---|---|
ORD PRICE: | 1,535p | MARKET VALUE: | £39.4bn | |
TOUCH: | 1,535-1,536p | 12-MONTH HIGH/LOW: | 1,537p | 1,192p |
FORWARD DIVIDEND YIELD: | 2.5% | FORWARD PE RATIO: | 15 | |
NET ASSET VALUE: | 414p | EMBEDDED VALUE: | 1,009p |
Year to 31 Dec | Net premiums (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2011 | 25.3 | 1.81 | 55.8 | 25.2 |
2012 | 28.6 | 3.12 | 85.1 | 29.2 |
2013 | 29.8 | 2.08 | 52.8 | 33.6 |
2014* | 32.9 | 3.16 | 86.9 | 35.6 |
2015* | 36.9 | 3.65 | 100 | 38.3 |
% change | +12 | +16 | +15 | +8 |
*Standard Chartered's forecasts Normal market size: 1,500 Matched bargain trading Beta: 1.39 |
True, Prudential's significant overseas presence does expose the group to foreign exchange headwinds. Factor in the relative strength of sterling and the group's new business profit growth in the first nine months looks rather less impressive: 8 per cent in the US and 1 per cent in Asia. But foreign exchange pressure could prove to be no more than a medium-term issue and, in any case, it doesn't reflect at all on the group's underlying performance within its local markets.
The company is hardly the best dividend payer in the sector, either. Based on end-2014's forecast payout, the shares yield 2.3 per cent, compared with over 4 per cent for shares in Legal & General (LGEN) and Standard Life (SL.). The sector's closed-life fund specialists offer even more: shares in Chesnara (CSN) and Friends Life (FLG) offer prospective yields of nearly 6 per cent.