Prudential Financial (NYSE: PRU) just weathered quite a storm for its business. For an insurance giant that prides itself on being financially rock solid, the recent economic situation was incredibly rough.
In particular, rising interest rates played havoc for the company, as it owns over $300 billion in bonds, all held as available for sale or as trading positions. When interest rates rise, the prices of existing fixed-rate bonds fall. In its 2022 annual report, Prudential Financial indicated that it had nearly $30 billion in interest rate related risks on its balance sheet, down from $40 billion the previous year.
Now that the Federal Reserve has indicated that it thinks it is done boosting rates, and indeed, that it might lower them in 2024, that rate-related pressure looks to be behind Prudential Financial. Given its bond-heavy balance sheet, the easing of those pressures is a key driver of why Prudential Financial is my top value stock to buy right now.
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Why it really looks cheap right now
Analysts expect Prudential Financial to close out 2023 earning a total of $11.78 per share for the year, and they have an average forecast of $13.31 per share in income for 2024. At a recent price of $104.34 per share, that puts it at a price-to-expected earnings ratio below 9 for this year and below 8 for next year.
That's the sort of earnings multiple you might expect from a company with absolutely no growth prospects. Prudential Financial, on the other hand, is projected to achieve a solid 10.5% annualized earnings growth rate over the next five or so years. While that's not exactly the fastest growth on the planet, it is solid enough to where its valuation looks downright cheap if its growth delivers anywhere near that rate.
Investors are also getting paid a decent amount to own its shares. The company currently pays a dividend of $1.25 per share per quarter, putting its yield at around 4.8%. Prudential Financial has a decent recent history of annual dividend increases, and with its $5 annual payment consuming less than half of its anticipated earnings, it may very well continue that dividend growth.
Then there's its rock solid balance sheet. Prudential Financial bases its whole corporate identity around that fact, using the Rock of Gibraltar as its corporate logo. The $300 billion in bonds on its balance sheet support a total shareholder equity above $26 billion.
An insurance company's balance sheet is critical to its success because the company is in the business of pricing and paying out on financial risks. Even if Prudential Financial's risk pricing models get it right on average, the reality is that people tend to buy insurance for the bigger risks that they face. If a whole lot of things go wrong at once for its clients, a strong balance sheet is crucial to the company's ability to pay out on those larger-than-expected claims.
This bargain price may not last long
While Prudential Financial looks like a value-priced company based on its prospects, based on its trailing earnings, the story isn't so clear. Its trailing price-to-earnings ratio is nearly 30, which may be scaring off people who are using automatic screeners with backward-looking metrics to look for bargains.
That high trailing price-to-earnings ratio is driven by a major set of write-offs in the October through December quarter of last year. Those write-offs look like they were one-time events, including over $1 billion from interest rate related investment losses.
Those one-time charges will roll off the company's trailing-12-month price-to-earnings ratio once it reports its final set of earnings for 2023. After that report, if it delivers as expected, its bargain price may simply be too cheap for the overall market to ignore. That makes now a great time to consider whether Prudential Financial could be your top value stock pick, as well as mine.
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Chuck Saletta has positions in Prudential Financial and has the following options: long January 2024 $110 calls on Prudential Financial, short January 2024 $115 calls on Prudential Financial, short January 2026 $82.50 puts on Prudential Financial, and short January 2026 $95 puts on Prudential Financial. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
