Is Prudential The Ultimate Retirement Share?

Published in Company Comment on 21 September 2012

Will shares in Prudential help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Prudential (LSE: PRU) (NYSE: PUK.US). Although Prudential is a famous British name, its insurance business is increasingly conducted overseas, where there is greater potential for growth.

Insurance masterclass?

Like all financial shares, Prudential was hit hard by the credit crunch, but unlike some of its peers, it has rebounded strongly and performed well against the FTSE 100 since then:

Total Return20072008200920102011Trailing 10 yr avg.
Prudential4.3%-38.9%58.4%7.5%-4.4%11.5%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%8.1%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Prudential's trailing 10-year average total return is highly impressive and suggests that the group's strategy of expanding into Asia is delivering strong growth.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Prudential shapes up:

ItemValue
Year founded1848
Market cap£21.1bn
Net debtn/a
Dividend Yield3.3%
5 year average financials
Operating margin4.7%
Interest covern/a
EPS growth10.8% (adj.)
Dividend growth9.2%
Dividend cover1.8x

Source: Morningstar, Digital Look, Prudential

Here's how I've scored Prudential on each of these criteria:

CriteriaCommentScore
LongevityA true blue chip.5/5
Performance vs. FTSESurprisingly good.4/5
Financial strengthIn good health, albeit vulnerable to big market shocks.4/5
EPS growthAsian and US growth is fuelling earnings.4/5
Dividend growthDividend growth is keeping pace with earnings growth.4/5
Total: 21/25

Prudential has distinguished itself from its UK peers Aviva (LSE: AV) and RSA Insurance (LSE: RSA) by switching its focus to Asian markets, where it has been able to achieve growth far ahead of what is possible in moribund UK and Western European markets. Nearly 80% of its profits now come from outside the UK and the Pru's latest move is into the US market, where it has been expanding fast with the help of the acquisition of Reassure American Life Insurance Company, which it purchased for £398m in May.

On the face of it, the Pru's score of 21/25 is thoroughly deserved and suggests that the share could make a strong long-term contribution to a retirement fund portfolio. Although it is more expensive, on a P/E basis, than its UK-focused peers, it remains at a substantial discount to the FTSE 100 average and I think that its future growth prospects, and the profitable plateau which should eventually follow, justify the price difference.

Expert selections

Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

> Roland owns shares in Aviva but does not own any of the other shares mentioned in this article.

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