Prudential Financial Could Be Right For Your Long-Term Portfolio (NYSE:PRU)

Prudential Financial, Inc. (NYSE:PRU) is an insurance group that offers a range of services, including life insurance, among other insurance products, and has assets under management that currently total $1.4 trillion. The insurance market, especially the life insurance market continued to be a slow-moving one. During the latest quarter, prudential witnessed slowed revenue recognition, mainly as the repricing of assets affected the top line. Asset management continues to be another source of growth for Prudential, which is looking to move beyond its current shores.

What is Prudential Doing to Improve its Earnings?

Prudential continues to grow at a steady rate and has been largely benefiting from cost-savings and improving its market sensitivity and exposure to assets. Prudential’s current quarter saw it return over $800 million, to its shareholders. The company has been witnessing strong cash flows regardless of a negative net income and the latest quarter saw Prudential posted over $4.5 billion in total cash flow during the quarter, which gets it back on track to a high cash flow company, something that had been an issue for a couple of quarters, owing to broader market issues.

Secondly, in order to improve investment outcomes, the company has been slowly moving assets into emerging markets, as it looks to ensure that its returns remain within acceptable standards. Emerging markets are expected to see a better returns on investment compared to developed markets.

Currently, the company has a dividend of around 6%, and that would be quite attractive to investors considering inflation remains around that level in most developing countries, and the latest reading for inflation showing 6%. In the latest CPI reading from the US. In the short term though, there are expectations of credit losses, which will reflect in the bottom line over the next few quarters, or at least until Prudential can re-adjust its portfolio.

The company continues to invest in a range of asset classes, in order to ensure their portfolio maximises returns, whilst being relatively safe. Both the equity portion and the credit portion continue to face headwinds, owning to repricing of assets, this has reflected in the profit & loss. Regardless, the portfolio remains relatively safe and well diversified, and should get back to profitability towards end of 2023-2024, when I predict that assets will become a lot more steady, as the Fed stop raising rates, and the economy adjusts from the base-effects of higher rates.

Prudential’s Asset Management Outlook

Prudential is increasingly looking to Asia for its PGIM operations and is targeting to $23 billion mutual fund industry. The company has had 13/14 years where it posted a positive inflow of assets, and is looking for its Asia Pacific operations to get similar levels of the Americas, with the Asian mutual fund industry and assets set to reach a total of $8 trillion assets under management by 2025.

Cost Saving Measures by Prudential

While, Prudential lost money on its Assurance IQ business, management has been slowly improving operational quality in other areas, such as call center optimization, process automation, and technology enablement, in order to save the company over $820 million in savings in the annual rate of savings. Once the market becomes steady this should reflect in the bottom line, and see improvements in the cash flow.

Where do the Opportunities Lie?

The company is looking to continue its work with Assurance IQ, offering its customers affordable products, that it can offer its consumers, it has dedicated increasing levels of capital towards Prudential Advisors, workplace financial services, and digital advice.

The company also continues to make new deals, in the Latin America region, including teaming up with players across Latin America, Asia, and Africa. The company has seen strong demand for its Latin American products, with third-party distributors now accounting for over 50% of the company’s products. Similarly Prudential is increasingly expanding its product offerings in Asia, where it continues to believe it will benefit the greatest from the growth and market penetration.

Product quality and improved distribution remain key to Prudential’s fortunes, and the company continues to expand its distribution, by teaming up with local players in major geographies. By teaming up with local players in China, India, and Indonesia in Asia, and in Latin America with local players in Argentina, Brazil, Chile, etc. Prudential is running a strategy that allows it get off the ground running and get straight to sales. This strategy has continued to pay-off along with targeting a broad range of products and services in the financial services space.

Valuation

Operating income continues to remain high with the latest quarter showing a total pre-tax adjusted income of around $4.7 billion. The company has seen impairment costs from its Assurance IQ products, despite the business segment becoming profitable during the fourth quarter. This led management during the earnings call to mention they will continue to invest in the products, hoping it can live up its initial hype, and Prudential can recover some of its $2.3 billion in investments..

The current P/E remains neither expensive nor cheap, with the current forward P/E of 8x, and the stock is unlikely to see significant returns at least until interest rates become more steady for a longer period, and risks to the economy remain a central part.

Risks

Rising interest rates remain the biggest risk for life insurance and asset management-focused funds, Interest rates are on the rise and this has caused a correction in both fixed-income prices and equity prices, which is now leading to issues related to lower recognition of revenue. These issues are going to remain for a while. Furthermore, there is a chance that inflationary conditions mean people might be less willing to invest in products, which will become more attractive, but so will savings accounts in banks. There may be a period of adjustment during that time, where banks receive a greater share of assets. Meanwhile, a global recession could slow down overall growth, leading to lower levels of overall allocation to mutual funds, especially in emerging markets.

Prudential remains a relatively overall safe bet, and since it’s held in large part by institutional investors, which means that the stock remains a relatively safe blue-chip stock. Meanwhile, the dividends are not likely to be at risk anytime soon, as we are likely over the most volatile period for assets. Central banks will continue raise rates for a while, but is unlikely they will raise rates much further. According to my estimates asset prices won’t be steady until the last quarter of 2023, where central bank rates, inflation, and the downside to the base-effect of higher interest rates finally gets to a point of equalization.