Over the past six months, Prudential’s shares (currently trading at $108.28) have posted a disappointing 7.9% loss, well below the S&P 500’s 8.4% gain. This might have investors contemplating their next move.
Is now the time to buy Prudential, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Prudential Will Underperform?
Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons you should be careful with PRU, plus one stock we’d rather own.
1. Net Premiums Earned Hit a Plateau
Net premiums earned are net of what’s paid to reinsurers (insurance for insurance companies), which are used by insurers to protect themselves from large losses.
Prudential’s net premiums earned was flat over the last five years, much worse than the broader insurance industry. This shows that policy underwriting underperformed its other business lines.
2. Substandard BVPS Growth Indicates Limited Asset Expansion
For insurers, book value per share (BVPS) is a vital measure of financial health, representing the total assets available to shareholders after accounting for all liabilities, including policyholder reserves and claims obligations.
Disappointingly for investors, Prudential’s BVPS grew at a mediocre 10.2% annual clip over the last two years.
3. High Debt Levels Increase Risk
The debt-to-equity ratio is a widely used measure to assess a company’s balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.
If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.
Prudential currently has $43.73 billion of debt and $32.32 billion of shareholders’ equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 1.3×. We think this is dangerous - for an insurance business, anything above 1.0× raises red flags.
Final Judgment
Prudential doesn’t pass our quality test. After the recent drawdown, the stock trades at 1.1× forward P/B (or $108.28 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Prudential
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