In the midst of volatile equity markets, growth stocks tend to underperform the broader market. For example, the tech-heavy Nasdaq Composite has slumped 14% year to date.
The steadier counterpart to growth stocks are value stocks, which often outperform growth stocks in uncertain times. Contrary to broader equity markets, Prudential Financial's (PRU 0.55%) stock has gained about 7% year to date.
Let's dive into three reasons Prudential looks like it's a buy even after its solid stock performance of late.
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1. Prudential consistently beats analysts' expectations
When Prudential reported its financial results for the fourth quarter of 2021 in early February, the company once again exceeded the analyst consensus for non-GAAP (adjusted) diluted earnings per share (EPS).
Prudential recorded $3.18 per share in after-tax adjusted operating income in the fourth quarter, or 13.6% more than the year-ago period. This blew the average analyst estimate of $2.39 for the quarter out of the water.
So how did Prudential top the average analyst earnings forecast for the ninth quarter out of the past 10? Prudential demonstrated strength in two out of the three predominant segments of its business.
Prudential's U.S. businesses segment provides retirement, group insurance, individual annuities, and individual life insurance to its customers. The segment posted $895 million in adjusted operating income during the fourth quarter, or a 12.7% year-over-year gain. These results were driven by higher variable investment income, higher net fee income, and appreciation in the stock market.
Prudential's international businesses segment provides products and services similar to the U.S. businesses segment. The segment produced $829 million in adjusted operating income in the fourth quarter, or 4.9% more than the year-ago period. Adjusted operating income was driven by higher net investment spread results, lower expenses, and business growth.
Prudential's global investment management business is known as PGIM. The segment generated $350 million in adjusted operating income during the fourth quarter, which was a 13.4% year-over-year decline. A 1.7% year-over-year increase in the segment's assets under management to $1.52 trillion allowed the company to achieve record-high asset management fees. But this was more than offset by lower incentive fees and higher expenses.
And thanks to the ongoing economic recovery from COVID-19 disruptions dating back to 2020, Prudential's adjusted book-per-share surged 14.7% year over year to $108.72 to close out 2021.
Analysts anticipate that economic growth and interest rate hikes will help Prudential to increase its adjusted diluted EPS at a 3% annual rate over the next five years. And given the 9.8% annual earnings growth that Prudential delivered to shareholders in the previous five years, these low growth projections seem to leave plenty of room for upside.
2. The dividend remains sustainable
Prudential appears positioned to steadily grow in the years ahead. And combining that with the stock's low dividend payout ratio should set it up to raise its dividend as well.
Prudential paid $4.60 in dividends per share during 2021, while it earned $14.58 in adjusted operating income per share for the year. This equates to a 31.6% dividend payout ratio, which gives the company a significant buffer to protect against a downturn in profitability during any economic recession. It also gives the company flexibility to pay down debt, buy back shares, and close on acquisitions to drive earnings higher.
That's precisely why I believe mid-single-digit annual dividend increases like the most recent 4.3% increase will persist for the foreseeable future. Paired with a 4.2% dividend yield, which is triple the S&P 500's 1.4%, Prudential stock offers investors a respectable blend of yield and growth.
3. A deeply undervalued stock
Based on my analysis, Prudential is a fundamentally strong business. However, this doesn't appear to be fully reflected in the stock price, now about $115.
Prudential's forward price-to-earnings ratio of about 9 is well below the life insurance industry average of 12.3. And the stock doesn't only appear cheap compared to its peers. Prudential is trading at a price-to-tangible book value of 0.7, which is significantly lower than its 13-year median of 0.9. This is why I believe the stock remains a buy for income investors at this time.
