Insurance giant Prudential Financial (NYSE:PRU) declared a quarterly dividend of $1.10 per share for the third quarter on Aug. 11, maintaining the same payout it had in the second quarter. That's one of the highest dividends in the financial sector and among the best on the market.
But can Prudential afford to sustain it in a tough market? Let's take a look to see if Prudential is a great dividend stock.
A great payout
The bottom-line number is fantastic. A $1.10 per share quarterly dividend comes out to $4.40 per year, per share. If you own 500 shares of Prudential, that comes out to $2,200 per year in your pocket if you choose to take the distribution (or in the stock if you'd rather reinvest it).
During tough financial times, that income becomes even more important for many investors, offsetting income losses due to layoffs, furloughs, or salary reductions. It is also great for retirees, who can use the dividend payout to supplement their income.
Is it sustainable?
Prudential has increased its dividend each of the past eight years, and over the past three years it has grown by 46%. It pays out a 6.3% yield, which means a full year's worth of the current dividend would amount to 6.3% of today's share price. A well-supported yield over 3% to 4% is considered good, so 6.3% is certainly at the top of the range.
We know it's well-supported because over the past 12 months, Prudential has a payout ratio of 37%, which means it pays out 37% of its annual earnings in dividends. That's in a healthy range; more than 50% would mean that the company might be paying too much out in dividends at the expense of investments or liquidity.
These are all good numbers. But Prudential has now had two straight quarters of net losses due to the COVID-19 pandemic. In the first quarter, Prudential had a net loss of $271 million, with all segments showing declines, including insurance, investment management, international, and retirement solutions -- driven by lower investment income due to the 0% interest rate environment and decreased underwriting earnings due to higher mortality rates caused by COVID-19. In the second quarter, it was even worse, as Prudential suffered a $2.4 billion net loss, down from net income of $738 million in the second quarter of 2019. Through the first six months of 2020, Prudential has had a net loss of nearly $2.7 billion.
Can Prudential sustain its great dividend in the face of these losses?
I think it can, for a couple of reasons. One, the company has a good balance sheet. Book value, which is a measure of shareholder equity, increased in the second quarter to $165.54 per share, up from $150.40 per share a year ago. A growing book value means it has more equity to cover losses.
Prudential also has great liquidity with $4.5 billion in liquid assets, down only slightly from a year ago, when it was $4.9 billion. Adding to that, the company will receive $1.7 billion from the sale of its Prudential of Korea, which is expected to close in the second half of this year. The company is also on pace to achieve $140 million in cost savings this year. Through the second quarter it had $75 million in cost savings, with $45 million in the second quarter alone.
Ultimately, Prudential has a great dividend, and it should be safe in the near future -- even through the losses -- with its great liquidity. However, how long it will be able to maintain and/or increase its dividend depends on the length of the recession and, more specifically, how long the pandemic lasts. So, it's safe for now, but keep an eye on it.