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Alberto Abaterusso
Alberto Abaterusso
Articles (1293) 

Prudential Financial Is a Cheap Value Stock

Prudential Financial passed most of the Brandes criteria for value stocks

June 12, 2018 | About:

When I was in search of value stocks, I screened the U.S. stock market using some of the criteria described by Charles Brandes (Trades, Portfolio) in his book, Value Investing Today.

Brandes' firm, Brandes Investment Partners, is a San Diego-headquartered investment follows the value investing approach and has about $30.3 billion under management for a broad range of clients globally. Over 80% of the total are assets managed for institutional clients. According to Brandes’ “four-step test for value,” the financier prefers stocks that meet the following criteria:

  • No losses within the past five years.
  • Total debt is less than 100 percent of tangible equity.
  • Share price is less than book value per share.
  • Earnings yield is at least twice the yield on long-term 20-year bonds.

I have used the same criteria but with some adjustments. Concerning the second of the four tests for safety by Brandes, I have screened the U.S. stock markets for companies that have the most recent quarter long-term debt-to-equity ratio that is no greater than 100%.

Value screening criteria

I prefer businesses that have shown growth in earnings over five fiscal years. The businesses must also have a price-to-tangible book ratio of less than 1, a market cap of more than $3 billion and the businesses must pay dividend. I have also chosen businesses with a forward dividend yield of more than 1.8% because that is the current dividend yield paid on average by the stocks that are members of the S&P 500 index.

It is also importnat to note that I have considered only those stocks with a trailing 12-month price-to-earnings ratio of less than 12. Why? Because the inverse of that ratio gives an earnings yield of more than 8.3%. A yield of 8.3% is double the monthly average spot rate of the 20-year high-quality market corporate bond. At 4.16%, the average is a mean value of the last 12 monthly spot rates.

Data on monthly spot rates of the 20-year high quality market corporate bond can be retrieved from the Economic Research website of the Federal Reserve Bank of Saint Louis (FRED).

According to FRED, “the HQM yield curve uses data from a set of high quality corporate bonds rated AAA, AA, or A that accurately represent the high-quality corporate bond market.”

Prudential Financial Inc.

Prudential Financial Inc. (NYSE:PRU) passed my stock screening. It is a financial services company that with its portfolio of life insurance mutual funds, retirement, annuity, real estate’s products, serves its retail and institutional clients in U.S. and in more than 40 other countries. Through its distribution networks, Prudential Financial is also active in many states of the U.S. with services of securities brokerage and administration and asset management. The company also provides pension and retirement-related investments.

Prudential has operations in the Americas, Europe and Asia. Prudential’s main operations are structured in two segments, financial services and closed block. 

Through strong business fundamentals, the American financial services company pursues long-term value creation for its stakeholders.

Some highlights about Prudential Financial demonstrate that the company has assets under management worth approximately $1.4 trillion.

Prudential holds hundreds of subsidiaries and about $3.7 trillion of gross life insurance in the entire globe. The distribution network of the company is composed of about 50,000 employees and sales partners worldwide.

On Fortune Magazine's 2018 list of “World’s Most Admired Companies.”  Prudential Financial is ranked first in the "insurance life and health" category.. The company also holds Forbes' first position in the insurance category and in the Just Capital’s 2017 JUST 100 list.

Financial data

Prudential Financial reported a first quarter of 2018 net profit of about $1.4 billion or $3.14 per ordinary share, versus a net profit of approximately $1.37 billion or $3.09 per ordinary share for the comparable of 2017. Prudential Financial closed the quarter with an after-tax adjusted operating income of $1.340 billion or $3.08 per ordinary share, which was an 8% increase on a year over year basis.

The stock is trading at $101 per share on the New York Stock Exchange and has a market capitalization of $42 billion. The stock has fallen 13% so far this year and has underperformed the S&P 500 index by 16%:

The stock is currently offering an entry point because the share price is below the 200, 100 and 50-SMA lines, as you can see in the chart powered by GuruFocus.

The share price is 6.7% off the 52-week low of $94.51 per share and far from the 52-week high of $127.14 per share.

Also, the Peter Lynch Chart indicates a convenient stock since the share price is far below the Peter Lynch Earnings Line (P/E = 15) of $268.8 per share and the Price at Med P/E without NRI (P/E = 12.46) of $223.3 per share.

Analysts have assigned a 2.2 recommendation rating. The recommendation rating ranges between 1 (Strong Buy) and 5 (Sell). As of June, there were seven analysts of a total of 16 who suggest buying shares of Prudential Financial, while nine analysts recommended holding the stock.

The average target price of $121.44, which is a mean of 16 estimates ranging from $102 to $135 per share, represent 20.4% growth.

According to GuruFocus, Prudential Financial has a forward dividend yield of 3.58% versus an industry average of 3.5%. The company distributes its free cash flow to the shareholders, according to an 18% pay-out ratio that represents a quarterly dividend of 90 cents.

For the second quarter of 2018, analysts are projecting revenue of $13.19 billion, which is a 1.2% increase from the prior-year quarter. Net earnings are expected to be $3.08 per ordinary share of Prudential Financial. A year ago, the company posted a net profit of $2.09 per common share.

Net earnings are expected to grow 5.5% from full fiscal 2018 to full fiscal 2019 while the same issue is anticipated to rise at a 9% annual average growth rate over the next five fiscal years.

For GuruFocus, Prudential Financial has a financial strength rating of 5 out of 10.

Prudential Financial is reporting 420 million shares outstanding, of which 58.67% is held by institutions and 0.43% by insiders.

The Vanguard Group and Blackrock are the top holders of the stock with a 7.26% and 7.11% of the total shares outstanding. Holdings are as of Dec. 30.

(Disclosure: I don’t have any position in any security mentioned in this article.)

About the author:

Alberto Abaterusso
If somebody asks what being a Value Investor means, Alberto Abaterusso would answer: “the Value Investor is not the possessor of a security that represents the company, but he is the owner of that company. As an owner of the company the Value Investor is actively involved in the dynamics of that company and his first aim is how to have sales progressively growing.”

Alberto Abaterusso would add: “probably the Value Investor is one of the least patient persons in the world concerning sales.”

Alberto Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

Rating: 4.5/5 (4 votes)



PiperMatrix - 7 months ago    Report SPAM

Great Article - thanks for all the time and effort that went into writing this.

Praveen Chawla
Praveen Chawla premium member - 7 months ago

The problem with Insurance stocks is that you don't know what is hidden in the balance sheet. Revenue (premiums) and cost of goods (claims) are years apart.

Based on median price/book ratio the stock does seem to be somewhat undervalued, but nowhere near the bargain you are suggesting.

Alberto Abaterusso
Alberto Abaterusso - 7 months ago    Report SPAM

Thank you for your comment.

I ALSO like to compare PRU’s P/B ratio with its comps’ P/B ratio. That is, to have a better indication whether the stock may either represent or not a bargain. Which are the comps to consider? The answer is crucial because the definition of the comparable firm’s sample influences the accuracy of a valuation method based on the P/B ratio.

A P/B ratio-based valuation method is highly accurate when the stock is compared with comps that have similar return on equity (ROE) and that, of course, belong to the same industry.

PRU has a ROE of 15.43%. Amid the U.S. publicly traded companies that operate in the financial services industry and that have a ROE of 10 to 20%, a P/B ratio of less than 1 and a P/E (NRI) of less than 12, PRU is performing well with an above average ROE, with a below average P/E (NRI) and with a P/B ratio that is on par with its comps.

In addition, according to the following 'Growth Estimates', the ROE should keep on improving and outperforming the market:

Growth Estimates PRU S&P500
Next Year 5.5% 0.10%
Next 5 Years (per annum) 9% 0.11%
Past 5 Years (per annum) 2.38% N/A

Source of data: Yahoo Finance

Praveen Chawla
Praveen Chawla premium member - 7 months ago

Thanks for your reply Alberto. I generally agree with your thesis. Also the US macro-economics predicts higher interest rates, which should boost performance of insurance assets.

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