Is Prudential Financial Stock Overvalued?

Prudential Financial (NYSE:PRU) is a global financial service company that deals in insurance, investment management, and other services. Tracing its roots to 1875, Prudential now has $1.5 trillion in assets under management.

While the stock up 19% year-to-date, whispers are growing into a chorus about whether Prudential is now trading at a premium? It it time to sell on valuation concerns?

Insurers Have Pricing Power But Face Headwinds

Insurance companies were disadvantaged at the turn of the decade when claims rose, mainly in the health and life insurance industries.

That period also disrupted the operations of financial markets in which insurance firms earn investment income. Indeed, lower economic activity meant both enterprises and consumers lacked the extra money to buy insurance in spite of its usual role as a staple.

More generally in the insurance industry the non-life insurance segment has remained steadier, and been on a path of stable growth because of price increases in almost all business lines.

Still, expenses on claims or loss costs have also been on the rise, and put pressure on the industry’s profitability, creating a challenging market landscape for the U.S. non-life insurance industry. In 2022, U.S. non-life insurers recorded a net underwriting loss of $26.9 billion, the largest since 2011.

What has traditionally benefited the insurance industry is the progressively higher premiums over time. Going forward, inflation may put somewhat of a dent in discretionary consumer spending and so hurt sales of policies, such as individual life insurance.

These impacts may well be offset by increases in the middle class and higher income levels in developing nations. Worldwide, the growing trend of life insurance sales is attributed to the young, technologically inclined population that perceives the need for protection.

Many insurers are in fact partnering with insure-tech firms in order to create offerings that appeal to this demographic and address the issue of costs.

So what does this all mean for Prudential?

Is Prudential Financial an AI Stock?

Formerly a mutual life insurance company directly owned by policyholders, The Prudential Insurance Company of America changed its status to a stock life insurance company in 2001, becoming a wholly-owned subsidiary of Prudential Financial.

The principal segments of Prudential include PGIM (global investment management), U.S. Businesses (Retirement Strategies, Group Insurance, Individual Life), International Businesses, the Closed Block division, and Corporate and Other operations.

In September 2023, Prudential together with Warburg Pincus and other institutional investors, established Prismic Life Reinsurance, Ltd., a Bermuda-based company in reinsurance.

Via an initial equity investment of approximately $200 million, Prudential took over 20% interest in Prismic Life Holding Company LP. This reinsurance operation opens up opportunities for investment, insurance, and retirement security worldwide.

Prudential is looking to broaden its business with the integration of new technologies and the overall fine-tuning of the business.

On September 15, 2023, Prudential Financial signed a new deal with EvolutionIQ, which has developed an artificial intelligence platform that can improve the disability claims ecosystem.

By integrating with EvolutionIQ, Prudential will be able to use the firm’s machine-learning capabilities to offer tailor-made solutions and streamline the claims process. 

Prudential has also been actively deploying artificial intelligence in its operations, specifically in the context of analyzing of big data to help improve decision-making and risk management as well as boost customer satisfaction.

AI systems help insurers automate underwriting, flag fraud in claims, and predict risk more effectively. Moreover, chatbots and virtual assistants enhance the customer experience.

As a part of the Prudential Vision of being an investing, insurance, and retirement security company, the incorporation of AI is broadly viewed as a key driver of efficiency that is multi-pronged and will make insurance and financial services more customer-friendly, accessible, and affordable.

Prudential Pays a Generous Yield

The company pays a $5.20 per share dividend annually, translating to a 4.15% yield at the current share price and that’s not the only thing to like about the financials.

The company returned $725 million to shareholders over the past quarter, which included $250 million in share repurchases and $475 million in dividends versus $713 million in the same quarter last year.

Prudential’s net income came in at $1.20 billion or $3.28 per share for the last reported quarter, compared with $511 million or $1.38 per share in the same period last year. Revenues rose from $12.58 billion in the second quarter last year to $13.84 billion in the same period this year.

Prudential’s book value per share was at $77.51, slightly lower than $77.65 in the year-ago period but the adjusted book value per share increased to $98.42 from $97.38. Assets under management grew to $1.48 trillion from $1.42 trillion in the prior year quarter.

Is Prudential Financial Stock Overvalued?

Prudential Financial appears marginally overvalued relative to the consensus fair value of analysts, which sits at $123.29 per share.

With that said, the PE ratio of 15.9x is not especially high, particularly when contrasted with net income forecasts for growth of 14.8% annually over the next five years.

And there is lots to like about Prudential Financial from its brand name and reasonable track record to its wide reach. Sure, global macroeconomic concerns have impacted most financial services firms and might stunt near-term growth potential, so new Prudential shareholders may be in for a bumpier ride if market volatility rises.

But with a steady dividend and share repurchase programs, enough pluses sit in the buy column versus minus signs in the sell column. And with over $61 billion in revenue generating nearly $3 billion in net income annually, the odds are Prudential will ride through any bumpiness and come out the other side without too many scrapes or bruises.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.