Economic and geopolitical concerns have proven too much for financial markets to overcome this year. That's why the S&P 500 index is down 21% from all-time highs set in early January.
Prudential Financial (PRU 2.67%) hasn't been entirely spared in the market downturn. But the stock for this asset manager and insurer is only down 14% year to date. This raises the following question: Is Prudential stock a buy at this time? Let's take a look at the stock's fundamentals and valuation to find out.
The company often beats the analyst earnings consensus
When Prudential reported its earnings results for the first quarter of 2022 in early May, the company easily surpassed the analyst consensus for non-GAAP (adjusted) diluted earnings per share (EPS). The company recorded $3.17 in after-tax adjusted operating income per share in the quarter, which was down 20.6% over the year-ago period. For more context, this was a 36.6% growth rate over the first quarter of 2020. Prudential's after-tax adjusted operating income per share managed to trounce the average analyst estimate of $2.67 for the quarter. This was the ninth quarter out of the last 10 quarters that Prudential has topped the analyst earnings consensus.
Temporary declines in two of the company's business segments were too much for strength in one of its business segments to overcome.
Prudential's global investment management (PGIM) or asset management segment posted $188 million in pre-tax adjusted operating income in the quarter. This was down 71.1% year over year, but there's more to the story. PGIM sold its interest in an asset management joint venture in Italy in the year-ago period for a $378 million gain, which created a difficult comparison period for the company. And higher asset management fees weren't enough to offset higher expenses and a decrease in co-investment income for the quarter.
The international businesses segment offers retirement, individual annuities, individual life insurance, and group insurance to customers outside the U.S. The international businesses segment generated $801 million in pre-tax adjusted operating income during the first quarter, which was an 8% year-over-year decline. Business growth wasn't able to offset unfavorable underwriting results in the individual life insurance business and lower net investment spreads in the first quarter.
Aside from a geographical perspective, the U.S. businesses segment is similar to the international businesses segment. The U.S. businesses segment produced $943 million in pre-tax adjusted operating income during the first quarter, which was 11.9% higher than the year-ago period. Favorable underwriting results in the individual life insurance business and lower expenses were the main factors that contributed to the segment's strong growth in the quarter.
And due to the economic recovery from the COVID-19 pandemic, Prudential's adjusted book value per share rose by 6.6% year over year to $107.16 for the first quarter. Upcoming interest rate hikes should help to improve Prudential's net investment spread, which will lead to higher investment income and earnings. This is why analysts are anticipating 3% annual earnings growth over the next five years from the company.
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A well-covered dividend
Income investors will be pleased to learn that Prudential's dividend yields a whopping 5.1%, and the payout looks to be safe.
This is because the stock's dividend payout ratio will be around 41% in 2022. Simply put, Prudential's low payout ratio builds in a margin of safety for it to continue paying its generous dividend through just about any economic environment. Combined with mid-single-digit annual dividend growth potential, investors can have the best of both worlds with the asset manager and life insurer: Current income and future income.
The stock is cheaply priced
Prudential's fundamentals seem to be healthy. And the valuation is the final factor that makes the stock a great buy for income investors.
That's because Prudential's forward price-to-earnings (P/E) ratio of 8.2 is slightly lower than the S&P 500 life and health insurance industry average of 8.9. A stock of Prudential's quality should arguably be trading in line with its industry peers, not below them.
And if that wasn't convincing enough, Prudential's price-to-tangible book value of 0.8 is less than its 10-year median of 0.9. Since the stock's fundamentals are stable, Prudential should revert back to its historical valuation.
