Prudential powers its profits but not its buybacks

Results for Hong Kong-based life insurer Prudential (PRU) seemed to tick most of the boxes, with a 45 per cent increase in new business profits of $3.1bn (£2.4bn) carrying the company well within range of its target of $4.4bn-$5.4bn by 2027.

The much improved result also meant a decent hike in the annual dividend of 9 per cent with future payouts expected to grow in that range. The tepid market reception on results day was slightly inexplicable, though seems to have been due to the lack of a significant buyback announcement, even though Prudential’s book is throwing off large amounts of excess regulatory capital – the free surplus was $2.74bn in 2023.

Part of the problem is that any significant buyback must be balanced between improving liquidity in the Hong Kong market by scrip share issuance, with a matching share buyback in London, which is an option that management is currently exploring. It must be done this way to avoid one group of shareholders being diluted at the expense of another. Consequently, the only significant capital outlay on shares was a $41mn buyback to neutralise the dilutive effect of vesting employee awards.  

The reticence around the shares also makes more sense when the generally poor sentiment towards any company with a large exposure to the Chinese market is considered. It was also an unfortunate coincidence that on results day a long-contested and highly controversial security law in Hong Kong was finally enacted, proving the point that sentiment is not just about economic performance in isolation.  

Operationally, the combination of Chinese visitors to Hong Kong buying insurance, plus a definitive recovery within that market was the main driver for the results, with Hong Kong now making up 45 per cent of total new business profits. This dwarfs most of its other markets with only Singapore’s contribution to IFRS profits of $584mn coming anywhere close to the $1.01bn that Hong Kong generated in 2023.  

Meanwhile, the Eastspring asset management business saw funds under management increase by 7 per cent to $237bn after some positive net inflows, though management expects that this will be offset by the expected redemption of funds managed on behalf of M&G (MNG).

Prudential’s current price/earnings rating of 9.9x Factset consensus looks respectable when compared with peers like Legal & General (LGEN), though the forward dividend yield of 2.3 per cent certainly isn’t. China and its environs are not a one-way ticket to riches any more and the risk premium for investors needs to reflect this reality. Hold.

Last IC view: Buy, 1,063p, 15 Mar 2023