Source: Wikimedia Commons.
Prudential Financial's (PRU 1.13%) stock has lost approximately 10% of its value since the beginning of the year. The recent equity market sell-off, which was partly fueled by a more cautious global economic growth outlook from the International Monetary Fund, has made financial stocks like Prudential Financial a lot cheaper.
So with increasing worries about the health of the global recovery, should you consider buying an insurance giant like Prudential Financial?
Recent equity market turbulence
The sell-off in equities in September and October had a nasty impact on a lot of stocks' year-to-date performances. Shares of Prudential Financial, for instance, have declined about 10% in 2014 as a result.
The IMF contributed to renewed economic uncertainty and weaker equity performance in the past few weeks as it reduced its global growth estimate from 3.4% to 3.3% in 2014, and from 4% to 3.8% in 2015, according to its World Economic Outlook report.
Profound long-term business drivers
While stocks are on sale once again, it is important to put things into perspective and realize the value that insurance companies like Prudential Financial bring to the table for long-term investors.
Prudential Financial's business will largely be driven by a powerful secular trend in demographics: An aging population. People nowadays live longer due to better workplace conditions and better medical treatment. With increasing life expectancy, it becomes paramount for investors to adequately prepare for an increasingly long retirement period as well, and hedge against longevity risk, which is the risk of outliving your assets.
Consequently, Prudential Financial, as an integrated provider of retirement solutions, could see strong growth in its annuities and retirement segments in the years ahead. In 2013, 63% of its U.S. pre-tax adjusted operating income of $3.9 billion was attributable to its service lines retirement (27% of total), and annuities (36%), which far outstripped is classic insurance business (18%).
The need for investors to prepare themselves for retirement via structured savings and annuity products, is something that could provide substantial tailwinds for Prudential Financial's earnings going forward.
Encouraging earnings and profitability trends
Whether global growth slows or not, geographically diversified insurance companies such as Prudential Financial should be able to weather a potential European hiccup. With its heavy concentration on the U.S. market, the insurance company is well protected against a short-term cyclical downturn in Europe.
After all, Prudential Financial is one of the world's largest insurance companies, with a market capitalization of $38 billion, total 2013 revenues of $41 billion, and a diversified revenue base over both geographies and service lines, including international insurance, asset management, annuities, retirement, and life.
So far, Prudential Financial has achieved respectable returns on equity, which have solidly increased over the past four financial years, regularly in double-digit percentages.
The insurance company has also stipulated its goal to deliver "a 13-14% ROE over a market cycle," and Prudential Financial looks to be well on track here: Its latest full-year return on equity was reported at a whopping 15.2%, while its ROE trend is encouraging.
Solid dividend value
Prudential Financial makes a solid investment proposition from a cash flow yield perspective, too. The recent sell-off has made Prudential Financial's stock extraordinarily attractive for another reason than just a lower price: Its dividend yield received a boost.
Prudential Financial currently pays investors $0.53 per share quarterly, which translates into a forward dividend yield of 2.54%. That's only slightly worse than MetLife's (MET 1.52%) 2.80% yield or American International Group's (AIG 0.78%) stingy 0.91% yield.
While there are certainly other sectors in the stock market that offer even higher yields than the large-cap insurance sector, Prudential Financial offers a great yield nonetheless, while investors can also look forward to capital appreciation potential stemming from continued earnings growth in a stronger U.S. economy -- Prudential Financial's core market -- and from higher secular demand for private retirement and annuity products.
Ignore short-term volatility
The sell-off in equities has had an extraordinarily negative effect on Prudential Financial's stock, and its weak year-to-date share performance is entirely attributable to the turbulence over the past three weeks.
Considering Prudential Financial's encouraging earnings and profitability trends over the past four financial years, and its respectable dividend yield, Prudential Financial's stock could very well be an interesting investment for long-term investors seeking income and capital appreciation potential in the years ahead.
