Prudential's Product Offering Impresses, Rising Costs a Woe

Prudential's Product Offering Impresses, Rising Costs a Woe

Prudential Financial, Inc. PRU, offering insurance and other financial products and services, is expected to experience massive demand for retirement benefits’ products as baby boomers approach the age of retirement. On the back of vast distribution network, a superior brand image and time-tested presence, the company will enjoy a competitive edge over its peers.

Riding on the strength of new recurring premium sales, an expanded product portfolio, wide distribution abilities as well as greater scale, the company has successfully become one of the top five individual life insurance companies in the United States.

Further, the company’s Retirement segment is set to benefit from the company’s penetration and leadership in the pension risk transfer business. Appetite for risk of pension plan sponsors has of late increased, given a low interest rate, greater accounting and regulatory changes and larger-than-expected funding contributions.

Moreover, variable annuities comprising important part of the Retirement business, is anticipated to deliver better risk-adjusted returns owing to less competition and an improved risk profile.

Given a solid international presence, the Multi line insurer is expected to deliver organic growth and with a solid foothold in the Asian markets, we estimate the company to utilize opportunities offered by such markets and improve long-term growth.

Also, the company’s Brazilian business has gained a sufficient scale and should become a key contributor to its earnings growth in the overseas division over the next few years.

Notably, the company delivered a positive earnings surprise in all the last four quarters with an average beat of 3.82%.

On the back of a robust capital position, Prudential has been enhancing shareholders’ value over a considerable period of time. The insurer’s annualized dividend has nearly doubled over the last five years and currently yields 3.66%, better than the industry average of 2.23%. It also has $1.5 billion under share buyback authorization for 2018.

Banking on a robust, sustainable cash generation, Prudential envisions a free cash flow ratio of about 65% of adjusted operating income on average over time. All these collectively make the company a lucrative pick for yield-seeking investors.

Shares of this Zacks Rank #3 (Hold) Multi line insurer have lost 2.6% in a year’s time compared with the industry’s decrease of 3.3%. We expect the aforementioned strengths to help the stock bounce back in the near term.

However, the company has been witnessing rising expenses, mainly due to higher insurance and annuity benefits, interest credited to policyholders, amortization of acquisition costs plus general and administrative expenses. This in turn, will restrict the operating margin expansion.

Nonetheless, the Zacks Consensus Estimate for current-year earnings per share is pegged at $12.12, representing a year-over-year increase of 14.6% while for 2019, the consensus mark stands at $12.91, translating into a 6.5% year-over-year rise. Additionally, Prudential has expected long-term earnings per share growth of 9%, better than the industry average of 8.2%.

Stocks to Consider

Some better-ranked stocks from the same space are The Progressive Corporation PGR, NMI Holdings Inc. NMIH and The Navigators Group, Inc. NAVG, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Progressive Corporation provides personal and commercial auto insurance, residential property insurance and other specialty property-casualty insurance plus related services, primarily in the United States. The company delivered positive surprises in all the preceding four quarters with an average earnings surprise of 9.19%.    

NMI Holdings provides private mortgage guaranty insurance services in the United States. The company pulled off positive surprises in all the trailing four quarters with an average positive surprise of 29.85%.

Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company came up with positive surprises in three of the preceding four quarters with an average beat of 19.54%.

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Prudential Financial, Inc. (PRU) : Free Stock Analysis Report
 
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