The persistently sluggish employment growth is restricting participation in the existing employee benefit plans. However, Principal’s strong franchise within the pension sector, aided by its diversification in both products and geography, positions it to benefit from the gradual recovery of the credit market. Decent capital levels and cost containment measures also augur well, though higher delinquencies in its commercial mortgage portfolio remain a matter of concern. We thus maintain our Neutral recommendation on Principal Financial Group Inc. (PFG).
In the third quarter of 2010, Principal Financial exited the medical insurance business (insured and self-insured). The medical business has been declining over some years. Following the divesture, the company will now focus its capital and other resources on the strategic opportunities in the growing asset accumulation and asset management businesses.
Principal Financial continues to enhance shareholder value through dividend payment. In the fourth quarter conference call, management said that it intends to deploy 65% of the operating earnings in either returning value to shareholders or in merger and acquisitions. Management expects to utilize approximately $700 million of capital over the next 12 months for appropriate merger and acquisition and share buyback.
Principal Financial’s assets under management grew 12% year over year to $318.8 billion as of December 31, 2010 driven by improved results at three asset management and asset accumulation segments. Moreover, the company experienced strong performances across all the segments, except US Insurance Solution, despite sluggish employment growth and restricted credit conditions. The company is well positioned given its extensive distribution footprint, best-in-class solutions and operational discipline to continue to deliver solid operating results.
However, Principal Financial’s investment portfolio has a high exposure to commercial real estate. Commercial mortgage loans and commercial mortgage-backed securities (CMBS) represent over 20% of the company’s investment portfolio. We expect the increasing delinquency rate and defaults under its commercial mortgage loan portfolio to keep the company’s financial strength and profitability under pressure. Further, the company expects delinquencies to continue rising in 2011.
Principal Financial’s fourth quarter earnings lagged the Zacks Consensus Estimate. However, results were above the year ago earnings largely driven by strong performances at Retirement and Investor Services as well as at Principal Global Investors.
Over the last 7 days as well as 30 days period, 1 out of 17 analysts covering the stock raised the estimate upward for first quarter 2011. Over the 7 days as well as 30 days period, 1 out of 19 analysts covering the stock raised the estimate upward for 2011. Over the same time frames, 1 out of 18 analysts covering the stock raised the estimate upward for 2012.
The Zacks Consensus Estimate for first-quarter 2011 is 70 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.95 per share and $3.38 per share.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries. It competes with Lincoln National Corporation (LNC).
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
PRINCIPAL FINL (PFG): Free Stock Analysis Report
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