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Berko: Prudential Financial a rock-solid investment

By Malcolm Berko

Published: September 16, 2018, 6:02am

Dear Mr. Berko: Because of my husband’s business, we recently had to buy a life insurance policy on him, and we decided to use Prudential. Unlike other life insurance salesmen we met, this man was very professional. He also advised us to buy 300 shares of Prudential stock, which yields 3.6 percent, because he believes that it could trade at $190 a share in four years. We trust him, but we would like your opinion, too.

— GS, Moline, Ill.

Dear GS: Most life insurance salespeople today are extremely knowledgeable professionals, and many are experts in multiple disciplines, such as financial planning, taxes and investment alternatives, including real estate and private investments in nonpublic businesses. Some, like your salesman, are even knowledgeable about the stock market. You were wise to seek a second opinion. There are too many nasties out there who’d steal your coin and do you wrong. But I agree with his recommendation to buy 300 shares of Prudential Financial.

Prudential has stood for strength, stability, expertise and innovation since its founding in 1875 — using the Rock of Gibraltar as its symbol since 1896. Few folks know that the forerunner to Prudential Financial (PRU-$98), rated A+, was the Widows and Orphans Friendly Society. When Prudential was founded, it was called the Prudential Friendly Society. PRU was founded by John Dryden (not the poet but the future U.S. senator), and it only sold burial insurance at the time. In the early 1900s, PRU, like many other insurers, earned the majority of its income selling industrial life insurance. Solicitors went house to house selling industrial life insurance to workers living in poor urban areas. Payments were collected by the solicitors or their assistants every month. These industrial workers paid twice as much as others for their insurance because less than 10 percent of their policies reached maturity. However, that business became much less profitable in 1907, when savings and loan associations began to sell life insurance, which they did at significantly lower premiums. However, today PRU is among the largest life insurance companies in America, with over $3.7 trillion of gross life insurance in force and about 50,000 employees.

PRU is a meld of more than 100 smaller financial businesses, with clients in 39 countries. Management operates three main business segments:

• Prudential Investment Management Services and Prudential Retirement accounted for 60 percent of 2017 revenues. These divisions include individual annuity sales, retirement accounts and asset management.

• The life insurance segment sells individual policies and group insurance, contributing about 5 percent of revenues.

• The international insurance divisions put 35 percent of PRU’s $53 billion of revenues on the income statement.

Meanwhile, interest rates are rising, and that’s good for Prudential and the entire life insurance industry. Between September 2017 and last month, the 10-year U.S. Treasury rose by almost 50 percent. It flirted with 3 percent in August — its highest level in four years. Faster economic growth — thanks to fiscal stimulus measures, tariffs and rising inflation — is boosting interest rates. And higher rates provide insurance companies with better investment results and improved profits, allowing for higher dividends.

In 2017, PRU posted earnings of $10.55 a share and paid a good dividend of $3.60, and the shares traded between $98 and $118. This year, revenues will most likely remain the same, but PRU expects to earn $12.35 a share and may raise its dividend to $4 while trading between $95 and $127 a share — proof that higher rates have enabled PRU to earn better underlying investment results and greater overall profits. And the consensus on Wall Street is that if rates continue to rise over the next few years, by 2022, PRU could produce revenues of $63 billion, produce earnings of $16.45 a share, have a $5.45 dividend and trade at 12 times earnings. The Rock could crack in two.

So, buy PRU as a long-term investment. I think it will double in the coming four to five years, and Value Line analyst Daniel Henigson seems to agree.

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