Prudential Financial (NYSE:PRU) is immediately identified by its longtime marketing symbol of "the rock." It is not only a brilliant stroke of advertising that has endured for decades, it also succinctly sums up what the company seeks to provide for its customers and investors -- strength and stability. As the largest life insurer in the United States, Prudential has largely been just that for customers through the years.

But these are particularly disruptive times as the nation deals with its worst health crisis in a century. In this difficult time for all, insurance companies have provided their much-needed services. But from a financial standpoint, insurers have struggled under the weight of increased claims. Investors may be wondering where an industry giant like Prudential stands right now. As the company is a diversified financial services firm that offers more than insurance, it has been able to navigate these difficult times. But is Prudential Financial a buy?

More than insurance

It helps to understand how Prudential makes money to determine whether or not it is a good investment. It has three major business segments: PGIM Investments; U.S. insurance businesses, which include group and individual life insurance as well as retirement products; and international insurance.

A view looking up at the Prudential Center in Boston.

Image source: Getty Images.

In the third quarter, PGIM buoyed earnings with $370 million in operating income, a 59% increase from the third quarter of 2019. The investment arm saw its assets under management reach a record high of $1.4 trillion, up 11% year over year. The gains were driven by market appreciation, strong inflows into fixed income investments, and higher asset management fees.

The international insurance business was also up 7.4% in the quarter, to $775 million, due to lower expenses, business growth, and more favorable underwriting results.

These gains offset a 4% decline in the U.S. insurance/retirement businesses to $873 million in operating income. The individual life/annuities and group insurance/retirement segments were only down about 2% each year over year. The drop is due to lower net fee income from the annuities business and less favorable underwriting results due to higher net mortality rates due to the pandemic.

The U.S. insurance businesses represent the largest slice of the income pie (about 57%). The company has made efforts to de-risk this segment of its businesses, given the difficult circumstances related to the pandemic and the economy. One example is its decision to discontinue sales of traditional variable annuities with guaranteed living benefits and replace them with its FlexGuard indexed annuity product, introduced in July. With FlexGuard, the interest rate is tied to an index, so customers can choose their level of protection, or buffer, from interest rate risk. FlexGuard accounted for 38% of Prudentialʻs annuity sales this quarter. Also, the U.S. life insurance business is pivoting toward non-guaranteed products and repricing to mitigate the impact of low rates.

Still, company officials expect lower sales of its annuities and life insurance products in the near-term along with increased net mortality rates. But, these changes could reduce the impact and the diversified streams from investment management and international businesses should keep earnings steady. Despite these challenges in the life insurance businesses, Prudential actually saw a net income gain of about 5% to $1.5 billion, year over year.

All about balance

It also helps that Prudential is a rock in terms of its balance sheet. The company has been great at managing expenses over the years, and that has continued through the pandemic. The company implemented a cost savings program at the start of the year to save $500 million through 2023 and has achieved $135 million of that through the third quarter. But the pandemic brought on an acceleration of that plan, as it has required new ways of working and operating, so now the plan is to save $750 million by the end of 2023.  

Further savings will result from plans to divest Prudential of Taiwan in 2021, following the sale of Prudential of Korea earlier this year. The sale of Prudential of Korea has improved Prudential's already strong cash position, with $6.1 billion in cash and liquid assets at the end of the quarter, which is statistically unchanged from a year ago.

The strength of the balance sheet enables Prudential to offer one of the best dividends in the sector, paying out $1.10 per share per quarter, which comes out to $4.40 per share annually for a yield of 5.8% at Friday's prices. The payout ratio to provide that great dividend is around 37%, which means it pays out just 37% of its earnings to fund the dividend. That is a comfortable payout range.

Prudential's book value per share also increased slightly in the quarter to $167 per share, which means it has growing shareholder equity to cover losses, even in a pandemic.

The stock price is trading well below book value at $75 per share, so that means it's a good value. Prudential is not going to shoot the lights out for you in terms of performance, but if you want a good, undervalued stock that is poised to emerge from the pandemic strong and pays a great dividend, this is a good place to look.