Principal Financial is a leader in providing administration services and asset management for small to mid-sized corporate retirement plans. Additionally, just over a third of its income comes from various life, annuity and dental insurance operations. Despite the overwhelming majority of income coming from the asset management business, the stock is priced like a less attractive insurer. In 2007, before the financial collapse, Principal stock surpassed $70 when operating earnings were $3.93 and book value was $26.55. So, the P/E ratio was 18x, and the stock sold for about 265% of its book value. Today, the stock sells at about 85% of expected year-end book value and at less than 9x expected 2013 earnings. Assets under management have been growing nicely; inflows alone account for a mid-single-digit growth rate. Because of Principal’s strength in asset accumulation in emerging markets, we believe that growth rate is sustainable. Further, the company is repurchasing about 3% of its shares each year, and it recently raised its dividend to a current yield of more than 3%. We believe that investors’ distaste for owning financial services stocks has given us a very attractive entry price for this investment.
From Oakmark Funds' third-quarter letter to shareholders.