Prudential thriving amid new strategy and fresh focus

Prudential’s new strategy and fresh purpose is increasingly evident, with an update which breezed past estimates from all angles, enabling a further boost to shareholder returns.

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The outlook comments are upbeat and reiterate expectations for double-digit growth in new business profit for this year. The highlight, however, 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.

While Prudential (LSE:PRU) is not traditionally known as a group where the dividend payment is a shining light – indeed, the 13% increase announced takes the projected yield to a pedestrian 1.8% - the share buyback direction should prove more than enough to assuage investors. The current $2 billion (£1.5 billion) programme is ongoing, with a further $1.1 billion announced, comprising $500 million in 2026 and $600 million in 2027. This is quite apart from the potential proceeds of the ICICI stake sale, which was previously estimated would net the group some $2.5 billion, which should also be returned to shareholders.

Such optimism will be justified if the current trajectory continues. For the first half, adjusted operating profit of $1.6 billion was 6% higher than the corresponding period, underpinned by 12% growth in new business profit to $1.26 billion and an improved margin of 38% from the 36% 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 16% and 8% respectively. The group’s exposure to other countries where retirement planning and wealth management are evolving was highlighted by growth elsewhere, such as the 34% boost in Indonesia.

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Indeed, 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. 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, taking the total of Funds Under Management 7% higher to $275 billion from a previous $258 billion. This was attributed to improved market conditions, better investment performance and strong retail momentum, with the structure enabling the virtuous circle of new funds being managed separately to benefit the group as a whole, with an improving trend towards equity funds being another area of promise.

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, with Hong Kong the group’s biggest single country of profit generation during 2024 at $1.1 billion. Competition across its markets persists, while costs for businesses are remaining generally elevated.

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Even so, 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. The shares are up by 52% this year alone, translating to a rise of 45% over the last 12 months, as compared to a gain of 11% for the wider FTSE 100.

Despite this hike, the historic valuation is not stretched by any means and indeed the shares remain down by 39% from the most recent peak of 1604p achieved in February 2018. With increasing shareholder returns allied to the significant potential and promise in both Asia and Africa, it seems that there is still much to go for. As such, the market consensus of Prudential not only as a strong buy, but also as a core portfolio constituent, is likely to continue.