We are initiating our coverage on the shares of the Prudential Financial Inc. (PRU) with a Neutral recommendation.
Prudential has one of the best collections of businesses in the U.S. life insurance sector, with strong positions in high margin businesses and a significant diversification. Though there was a drag on revenues in 2008 due to the volatile economic environment, the company has consistently increased its revenues over the past several quarters. With a right mix of business and strong fundamentals, Prudential is poised to grow its earnings faster than its peers in the upcoming years.
Prudential has a strong international presence that provides it with better organic growth opportunities than its peers. Revenue from its international business as a percentage of total revenue has increased from 31% in 2008 to 39% in nine months ended 2009. We believe the company’s significant international presence will be a major driving factor in the future.
Prudential has bolstered its financial strength and flexibility through long-term debt and equity issues of approximately $4.4 billion in the first nine months of 2009. Moreover, during Dec. 2009, the company sold off its 23% stake in Wachovia Securities to Wells Fargo (WFC) resulting in a freeing up of $2.8 billion in equity. The proceeds will significantly increase the risk-based capital ratio of the company enabling it to expand its business without worrying about capital constraints.
The company is also in compliance with the risk-based capital requirements. Therefore, we believe that Prudential’s strong balance sheet will steer it through the current environment to achieve long-term goals.
We are also impressed by the rating improvement by Fitch to stable from negative in Dec. 2009. The rating agency acknowledged Prudential’s progress in addressing concerns regarding its capitalization, liquidity position and overall financial flexibility.
Also in December, the company increased its dividend by 21%. Historically, the company generated return on equity (ROE) in the mid- to high teens. For the nine months ended Sept. 2009, ROE was 12.4%. We believe management is on track to achieve its mid-term ROE target of 13–15%.
Negatives include earnings in certain segments of Prudential’s business, such as annuities and retirement savings, depending on conditions in the stock market and credit market. Prudential’s results are sensitive to the market because the company sells retirement and savings products that are partly tied to the market. It also charges fees based on assets under management and invests the premiums collected in credit markets. Since both these markets have been volatile and will remain so in early 2010, there is continuing earnings uncertainty for the company.
Though Prudential maintains a liquid and high-quality investment portfolio, investment performance deteriorated recently due to sharply widened credit spreads on fixed income securities and the steep decline in equity markets. We anticipate realized investment losses to continue at least through the first half of 2010.
With fourth quarter results due on Feb. 11, 2010, the Zacks Consensus Estimate is a gain of $1.10 per share.
Read the full analyst report on “PRU”
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