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Prudential’s (LSE: PRU) share price is close to its 13 November 12-month traded high of £11.09. This, though, does not mean no value is left in the stock.
There could be lots, or none, but assessing which has little to do with a share’s price. This is just whatever the market will pay at any given moment. Value reflects the true worth of the underlying business’s fundamentals.
So, how do these look in Prudential’s case, and what does it mean for the stock’s true value?
Core business outlook
The Q3 performance update released on 30 October highlighted the firm sustaining double-digit growth across key metrics.
More specifically, new business profit jumped 13% year on year to $705m (£533m). This came after a 10% rise in Q3 annual premium equivalent sales to $1.716bn and a one percentage point rise in new business margin.
Over the same period, Prudential’s wholly-owned Eastspring Investments saw net inflows of $3.4bn. This brings the total now under management to $286.4bn.
The same broad story was seen in the investment giant’s earlier full-year 2024 numbers. New business profit climbed 11% to $3.08bn, and adjusted operating profit before tax rose 10% to $3.13bn.
Overall, it looks to me like Prudential is delivering on guidance for rising profits and margins, while maintaining capital strength.
A risk here for the Asia-focused firm is that sudden regulatory changes could affect product approvals, distribution, or capital requirements.
However, for 2025, it expects its new business profit and earnings per share to grow by 10%+.
Are the shares undervalued?
A discounted cash flow valuation shows the stock is 43% undervalued at its current £10.91 price.
Therefore, its ‘fair value’ is £19.14.
In my experience, this is the best method of ascertaining the true worth of a stock. This is because it uses cash flow forecasts for the underlying business to pinpoint where a share should be trading.
It also means it is a standalone valuation, unaffected by under- or overvaluations across a sector as a whole.
That said, secondary confirmations of this undervaluation do come from comparative measures as well.
For example, Prudential’s 10.7 price-to-earnings ratio is bottom of the list of its competitors, which average 19.1. These comprise Allianz at 10.7, MetLife at 13.9, Manulife Financial at 15.5, and Aviva at 33.3.
My investment view
I already hold several stocks in the financial sector, so buying another would unbalance the risk-reward profile of my portfolio.
Aged over 50, I am also keen where possible to invest in stocks that also deliver a high dividend yield. I aim to increasingly live off the income from these, while I continue to reduce my working commitments.
In this context, Prudential’s current dividend yield is just 1.6%. Analysts forecast this will rise next year to 2% and in 2027 to 2.3%.
However, these numbers are way off the 7%+ I look for. This incorporates ‘compensation’ for taking the extra risk of investing in shares over no risk at all. And currently the ‘risk-free rate’ (10-year UK government bond yield) is 4.4%.
So, Prudential is not for me on these two factors. But I think it worth considering for investors to whom these are less important.
In the meantime, other high-yielding, highly undervalued stocks have caught my attention.
