Prudential’s sub-£11 share price looks a bargain to me, but how cheap is it?
Prudentialâs (LSE: PRU) share price is close to its 13 November 12-month traded high of £11.09. This, though, does not mean no value is left in the stock.
There could be lots, or none, but assessing which has little to do with a shareâs price. This is just whatever the market will pay at any given moment. Value reflects the true worth of the underlying businessâs fundamentals.
So, how do these look in Prudentialâs case, and what does it mean for the stockâs true value?
Core business outlook
The Q3 performance update released on 30 October highlighted the firm sustaining double-digit growth across key metrics.
More specifically, new business profit jumped 13% year on year to $705m (£533m). This came after a 10% rise in Q3 annual premium equivalent sales to $1.716bn and a one percentage point rise in new business margin.
Over the same period, Prudentialâs wholly-owned Eastspring Investments saw net inflows of $3.4bn. This brings the total now under management to $286.4bn.
The same broad story was seen in the investment giantâs earlier full-year 2024 numbers. New business profit climbed 11% to $3.08bn, and adjusted operating profit before tax rose 10% to $3.13bn.
Overall, it looks to me like Prudential is delivering on guidance for rising profits and margins, while maintaining capital strength.
A risk here for the Asia-focused firm is that sudden regulatory changes could affect product approvals, distribution, or capital requirements.
However, for 2025, it expects its new business profit and earnings per share to grow by 10%+.
Are the shares undervalued?
A discounted cash flow valuation shows the stock is 43% undervalued at its current £10.91 price.
Therefore, its âfair valueâ is £19.14.
In my experience, this is the best method of ascertaining the true worth of a stock. This is because it uses cash flow forecasts for the underlying business to pinpoint where a share should be trading.
It also means it is a standalone valuation, unaffected by under- or overvaluations across a sector as a whole.
That said, secondary confirmations of this undervaluation do come from comparative measures as well.
For example, Prudentialâs 10.7 price-to-earnings ratio is bottom of the list of its competitors, which average 19.1. These comprise Allianz at 10.7, MetLife at 13.9, Manulife Financial at 15.5, and Aviva at 33.3.
My investment view
I already hold several stocks in the financial sector, so buying another would unbalance the risk-reward profile of my portfolio.
Aged over 50, I am also keen where possible to invest in stocks that also deliver a high dividend yield. I aim to increasingly live off the income from these, while I continue to reduce my working commitments.
In this context, Prudentialâs current dividend yield is just 1.6%. Analysts forecast this will rise next year to 2% and in 2027 to 2.3%.
However, these numbers are way off the 7%+ I look for. This incorporates âcompensationâ for taking the extra risk of investing in shares over no risk at all. And currently the ârisk-free rateâ (10-year UK government bond yield) is 4.4%.
So, Prudential is not for me on these two factors. But I think it worth considering for investors to whom these are less important.
In the meantime, other high-yielding, highly undervalued stocks have caught my attention.
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Simon Watkins has positions in Aviva Plc. 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.
