BBeing an income investor in today’s low performing environment can be overwhelming and feel like you are fighting a losing battle. After all, how can you make your nest egg work for you when the average stock returns in the market? S&P 500 has been below 1.3% lately and is approaching its all-time low of 1.1%?
Yields are so low mainly because the markets have been trading so high lately. Fortunately, there is still hope for income investors and it has nothing to do with the recent market downturn. In other words, there is hope if investors know where to look.
Income investors looking for a strong return might consider Prudential financial (NYSE: PRU). This diversified insurer and asset manager benefits from constantly growing equity markets. Let’s see if Prudential is a buy based on its fundamentals and valuation.
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Huge third quarter earnings beat
Prudential declared $ 1.49 billion in non-GAAP after-tax (adjusted) operating profit in the third quarter of $ 3.78 in earnings per share (EPS). This represents a 22.7% year-over-year growth rate compared to the adjusted EPS of $ 3.08 generated in the prior year period. Prudential topped analysts’ forecast of $ 2.68 in Adjusted EPS by an astounding 41%, which begs the question: What drove Prudential’s statistically significant profit increase?
To answer this question, it is important to understand the three main operational segments of Prudential’s business (disregarding the smaller business segments and âothersâ that typically operate at a loss):
- PGIM is the investment management business of the company that derives income and profits from the expense of asset management and financing of companies in their early stages of development.
- American companies offers a variety of services, including pension insurance, group life and disability insurance, individual annuities and individual life insurance.
- International companies provides the same services as the US business segment, but in countries around the world.
PGIM segment saw its assets under management increase 5% year-over-year to a record high of $ 1.51 trillion in the third quarter, which helped generate asset management fees record. But higher spending and lower investment in businesses more than offset the rise in asset management fees, as PGIM segment adjusted operating profit before tax fell 11.6%. year-over-year to $ 323 million in the third quarter.
Prudential’s US business segment is the largest in terms of adjusted operating income before tax. The industry tailwind of an increase in net fee income due to the appreciation in the financial markets was partially offset by unfavorable underwriting results. The unfavorable underwriting results hint at the impact the delta variant of the coronavirus has had on the life insurance business. Based on opening remarks during Prudential third quarter 2021 earnings call According to its head of US companies, Andy Sullivan, the company expected 30,000 deaths and actually recorded 95,000 in the third quarter. Even with the increase in life insurance payments resulting from COVID-19-related deaths in the quarter, Prudential’s adjusted operating profit before tax climbed 28.5% year-on-year to 1.09 billion dollars in the third quarter.
Similar to US businesses, the international business segment has faced the headwind of an increase in COVID-19 deaths due to the delta variant. However, business growth and lower spending in the segment were enough to propel its adjusted operating income up 14.5% year-over-year to $ 887 million in the third quarter.
A solid and reliable dividend
Even with some headwinds related to COVID-19, Prudential’s third quarter results were excellent, which is encouraging. But the question dividend investors should be asking themselves is: is the stock’s earnings power enough to support its generous 4.2% dividend yield?
The average analysts’ EPS (non-GAAP) forecast for Prudential next year is $ 12.60. Against an estimated dividend requirement per share of $ 4.88 (assuming a 6% increase in the quarterly dividend to $ 1.22 per share), this equates to an estimated dividend payout ratio of just 38.7% for next year. This ratio creates a significant safety margin for Prudential to continue paying its dividend, even in the event of an economic recession. And analysts predict that Prudential will increase its non-GAAP EPS by 8.5% per year over the next five years, likely because rising interest rates will boost the company. So this stock has plenty of room for medium term dividend growth.
An attractive mix of value and growth
Thus, Prudential is a quality company with a fairly protected payment. The only question remaining is whether the current valuation of the stock warrants a buy from investors.
At its current price of around $ 109, Prudential is trading at a price / earnings-growth ratio (PEG) of 0.7. That’s a little lower than the average PEG ratio of 0.73 of its industry peers, suggesting that the stock offers investors a better mix of growth and value than the industry average. This is why Prudential is an excellent dividend stock for investors at buy on sale.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.