How Safe Is Your Money In Prudential plc?

Prudential plc (LON:PRU) has delivered share price growth of nearly 600% over the last five years, but are the foundations still solid?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

prudential

Prudential (LSE: PRU) (NYSE: PUK.US) impressed markets with a 17% increase in operating profits in 2013, backed up with a 15% increase in the firm’s full-year dividend, which rose to 33.6p, giving a yield of 2.4%.

Prudential’s Asian and US growth stories appear to be intact, but even the most bullish investor should probably take note that the firm’s shares currently trade on 26 times reported earnings, and have risen by 575% over the last five years.

Should you invest £1,000 in Prudential right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Prudential made the list?

See the 6 stocks

Spectacular growth stories such as Prudential’s usually come to a halt at some point — sometimes quite painfully. I’ve been taking a closer look at some of Prudential’s key financial ratios to see if I can spot any red flags.

1. Operating profit/interest

What we’re looking for here is a ratio of at least 1.5, to show that Prudential’s operating earnings cover its interest payments with room to spare:

Operating profit / Operational finance costs

£2,954m / £305m = 9.7 times cover

Prudential’s operating profits cover its interest payments (those related to its business, not investments) by almost ten times, so there’s very little risk that debt servicing costs will threaten dividend payments.

2. Debt/equity ratio & cash generation

Commonly referred to as gearing, this is simply the ratio of debt to shareholder equity, or book value (total assets – total liabilities).

Prudential’s 2013 accounts show that its net corporate debt is just £898m, giving net gearing of just 9.3%, which is very low risk indeed.

I don’t see any realistic likelihood that Prudential’s corporate debt could interfere with its dividend, especially as the firm generated surplus cash of £2,462m in 2013, covering its combined interest and dividend payments by 2.3 times.

3. IGD capital surplus

The Insurance Groups Directive (IGD) capital surplus sounds a bit of a mouthful but is actually a very simple — and important — figure.

Insurance firms have to hold a certain amount of surplus capital to ensure they can cope with unexpected events and financial problems. Prudential’s requirement is around £1.8bn, but the group says that it currently has an estimated capital surplus of £5.1bn, covering its requirements 2.8 times.

This is very comfortable — in comparison, RSA Insurance Group only has coverage of 1.8 times, and Aviva has 1.7 times coverage.

Is Prudential still a buy?

In my view, Prudential shareholders who are sitting on big profits can sleep easy and enjoy the firm’s rising dividend. Although a share price correction is possible, Prudential’s underlying finances look very safe indeed, and I don’t see any risk of an RSA-style meltdown.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Prudential right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Prudential made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland owns shares in Aviva but does not own shares in Prudential or RSA Insurance Group.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »