I love buying bargain-priced FTSE 100 shares but these two baffle me. They’ve been falling for years and look great value, but still fail to kick on. Is that about to change?
The first company is Asia-focused insurer and asset manager Prudential (LSE: PRU). I banked a handy 70% profit back in the day and for a while I regretted selling, as I expected profits to grow at speed as the emerging Asian middle class snapped up its protection and pension plans.
Instead, I dodged a bullet as the Prudential share price has fallen 55.79% in three years, and 22.27% in the last 12 months.
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With a price-to-earnings ratio of 9.47, well below the FTSE 100 average of 15.4 times, it looks good value today.
What’s gone wrong with the share price?
First-half results, published on 27 August, showed new business profit up 8% to $1.47bn. Unfortunately, that was well down on last year’s “exceptional” 47% growth. The board remains confident of hitting its medium-term objectives and hiked the dividend 9%. And still investors don’t care.
Most of the big FTSE insurers and asset managers are struggling (Aviva being the rare exception). The difference is that most pay income of between 7% and 10% a year. Prudential’s trailing yield is relatively low 2.55%, despite the board targeting dividend growth of 7-9% a year.
It may pay less income but offers a bigger potential growth opportunities across China, Singapore, India, Malaysia, Taiwan and Africa.
The 14 brokers offering one-year share price forecasts have set a median target of 124.3p, which is up just 0.8% from today. Until China sorts out its economy, I think Prudential shares may continue to underperform.
I’ve never held fund manager Schroders (LSE: SDR) but my finger has paused over the Buy button on several occasions. I’m glad I restrained myself, with the shares down 41.11% over three years and 1.27% over 12 months.
Can Schroders shrug off its problems?
By contrast to Prudential, the stock comes with a meaty trailing yield of 6.03%. The flipside is that it’s more expensive, trading at 14.50 times earnings.
Back on 1 August, Schroders’ first-half results showed record assets under management of £773.7bn, up 6.56% year-on-year. The board hailed positive market conditions and a robust investment performance, but a 7.7% dip in operating profits took the wind out of its sales.
The 14 analysts offering one-year share price forecasts for Schroders have set a median target of 385.2p. That’s up 7.98% from here. It might happen.
I think we just have to accept that investors just aren’t that into FTSE 100 financial stocks at the moment. Investing is cyclical, and this could change once interest rates finally start to fall, and savings rates and bond yields follow. At that point, investors may be more willing to take on extra risk, to generate a higher of return. We’re not there yet though.
I already have enough exposure to the financial services sector through ultra-high yielders M&G and Legal & General Group. Prudential and Schroders look good value but that’s been the case for yonks and it hasn’t helped. They’ll languish on my watchlist for now.
