Prudential dividend and profit growth justify optimism

Prudential (LSE:PRU)’s fresh purpose is now evident and entrenched, with its stretching strategic targets increasingly coming within comfortable reach.

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A current highlight is the group’s assertion that it has reached an inflection point in its growth of free surplus capital generation, which in turn will result in higher shareholder returns. Indeed, last year’s $2 billion (£1.5 billion) share buyback programme has been completed, while in January the group announced a further $1.2 billion buyback, $700 million related to the proceeds of the ICICI IPO in India, to be followed by a further $1.3 billion in 2027.

As part of the process, Prudential also announced a 15% increase to the dividend. While the group is not traditionally known as one where the dividend payment is a shining light – indeed, the projected yield after the hike remains a pedestrian 1.8% - the share buyback direction should prove more than enough to assuage investors, with total shareholder returns in excess of $7 billion expected between 2024 and 2027.

In the meantime, the free surplus ratio of 221%, as compared to 234% at the end of last year, is comfortably ahead of the group’s target range of between 175% and 200%, which augurs well for further shareholder distributions.

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Such optimism will be justified if the current trajectory continues. For the year, adjusted operating profit of $3.31 billion was 6% higher than the corresponding period, underpinned by 12% growth in new business profit to $2.78 billion and an improved margin of 42% from the 40% of a year ago.

Within the profit number, concerns have been temporarily shelved on the fortunes of its core Hong Kong and mainland China businesses, which reported growth of 12% and 27% respectively. The group’s exposure to other countries where retirement planning and wealth management are evolving was highlighted by growth elsewhere, such as the 11% boost in Indonesia.

Prudential is now focused on Asia and Africa, where the group is fully aware that such major continents bring significant opportunities. The combined populations of the two continents is around four billion, with an estimated $1 trillion of additional annual gross written premiums by 2033 being the addressable market.

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In addition, the group previously noted that insurance penetration remains low in Asia, where growing demand for savings and protection products come alongside the need for wealth management and retirement planning amid a higher income market. Given the recent weakness of consumer confidence in the region, it will be interesting to see whether, when customers are reluctant to spend, they turn to saving and wealth planning instead.

Another driver of growth which the group sees as an integrated offering is the Eastspring investment arm, which reported strong net inflows, driving total Funds Under Management up by 7.6% to $278 billion. This was attributed to improved market conditions, with the structure enabling the virtuous circle of new funds being managed separately to benefit the group as a whole.

Elsewhere, the focus on digital distribution and the move towards more technology-based solutions continues apace, such as the increasing use of advanced analytics and AI for higher value purposes, which is being selectively trialled.

Less positively, and from a broader perspective, heightened geopolitical tensions between the West and China cannot be overlooked, while competition across its markets persists. The sector as a whole has had a challenging start to the year, with an uncertain recovery in China, wider market weakness and potential AI disruption in distribution all playing a part, let alone fractious geopolitical relationships.

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Even so, the shares are up by 42% over the last year, as compared to a gain of 20% for the wider FTSE100 index. Despite this hike, the historic valuation is not stretched by any means and indeed the shares remain down by 42% from the most recent peak of 1,906p achieved in January 2018.

With increasing shareholder returns allied to the significant potential and promise in both Asia and Africa, the likelihood of Prudential remaining a core portfolio constituent will no doubt remain high. The market consensus of the shares as a strong buy would certainly suggest so.