Up 48% from its lows, this FTSE 100 stock still looks undervalued to me
The FTSE 100 might have bounced back strongly from the recent sell-off but there are still a number of stocks that trade at historically low multiples and don’t reflect their underlying growth potential.
One business I continue to remain bullish on and feel is worth considering is leading Asia-focused insurance firm Prudential (LSE: PRU).
Sales leads
Agency staff are the lifeblood of the insurance giant’s business. Its 65,000 average monthly agents work directly with customers helping them address their savings and protection needs. They’re effectively the equivalent of financial advisers in the UK.
Over the past few years its agency business has grown new business profit at a compound annual growth rate of 31%. A significant chunk of this growth I attribute to the quality of its recruitment process. Its training programme, PRUVenture, is one of the most respected in the industry, providing its agents with the necessary soft skills to build trusted relationship with clients.
In addition, its agents form the second largest agency force of the prestigious Million Dollar Round Table association. Back in February, it announced a long-term strategic partnership with that body. As more top talent becomes associated with this organisation this will drive increased employee engagement and, ultimately, improve the bottom line.
Shareholder returns
Prudential’s dividend payout isn’t in the same league as high-yielding Aviva or Legal & General. However, it does offer the potential for returns to increase at a faster rate than its UK-focused peers.
Last year, it paid out $600m in dividends, up 13% on the previous year. On top of that it also bought back $800m of its own shares. This year, it expects the dividend per share to grow by 10%. That puts it on a forward yield of 2.1%.
Back in February, it announced it was evaluating the potential listing of ICICI, its Indian asset management company. It has a 49% stake in this business. Details of the IPO are due soon. Although the price tag’s unknown, Bloomberg sources have put the valuation as high as $12bn. Net proceeds from the sale will be returned to shareholders.
China
Over the past four years, the stock’s price has fallen by nearly half. One of the main reasons for this has been ongoing weakness in the Chinese economy, one of its biggest markets. That remains one of the biggest risks moving forward. The long-term consequences following the collapse of a housing bubble are still unknown.
Like all insurance businesses, Prudential invests its premiums in the stock and bond markets. Heightened volatility affects the value of its underlying portfolio and, therefore, its balance sheet.
Despite the risks I remain extremely optimistic about the prospects for the business. A combined market population of 4bn provides it with growth opportunities simply not available in Western markets.
Many of the countries it operates in, such as India, are growing extremely fast. But life and medical insurance penetration rates remain in low single digits.
Today, Asia accounts for 30% of total global wealth. A growing middle-class population across this continent is fuelling demand for high quality financial advice. With such an attractive investment proposition, a forward price-to-earnings multiple of just 12 looks undemanding to me. That’s why I recently topped up my holdings.
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Andrew Mackie owns shares in Prudential. The Motley Fool UK has recommended Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
