Insurance giant Prudential Financial Inc. (NYSE: PRU) hasn’t gotten any traction since reporting fourth-quarter results on February 7, but there’s room for some optimism about the company’s performance in the next couple of years.
The company’s healthy dividend yield of 5.08% plays a role in attracting investment. However, the stock has pros and cons, relative to some of its peers in the S&P 500 financial sector.
Big financials such as Prudential and investment banks, and integrated banking institutions are beginning to flex their muscles after suffering through a dismal 2022.
The broad sector, as tracked by the Financial Select Sector SPDR Fund (NYSEARCA: XLF), is down 4.48% in the past year. That’s not as bad as some other sectors, and its 12-month track record is helped by a stop-and-start rally that began in October.
Prudential’s after-tax adjusted fourth-quarter earnings came in at $2.42 per share. That was down from $3.18 a year ago, and missed analysts’ views, according to MarketBeat earnings data.
Nonetheless, analysts are maintaining a “hold” rating on Prudential with a price target of $103, an upside of 4.17%.
While a price gain of 4.17% may not seem exciting, Prudential’s dividend is attractive for many income investors. Prudential increased its dividend in the past 15 years, landing it a spot on MarketBeat’s dividend achievers list.
Prudential shares eked out a positive return of 0.98% in the past month, but several other big financials have lapped that performance. Large-cap financials with better one-month price gains include:
- JPMorgan Chase & Co (NYSE: JPM): +2.58%
- Morgan Stanley (NYSE: MS): +1.88%
So what’s going on here? In part, the broader market has been attempting to rally this year. The broader S&P 500 is up 3.95% year-to-date, while the financials sector is up 4.09%.
While high interest rates aren’t pleasant for consumers, bank investors can see the benefits. As banks collect higher fees for lending money, their revenue increases, resulting in higher profit.
The S&P financial sector, as a whole, is trading where it was in March and April of 2022, meaning it’s recovered a good chunk of last year’s losses. As of February 23, the sector, as reflected by the XLF ETF, has a price-to-earnings ratio of 14.38, lower than all but energy and basic materials. Although it’s difficult to compare P/E ratios of the various sectors, due to different business models and factors that go into valuations, financials’ P/E suggests that there’s still value to be had.
In a February 17 note, researcher FactSet reported that overall sector earnings are declining. Of the companies named above, only HSBC and JPMorgan Chase saw year-over-year earnings increases in their most recent quarters. Both attributed the gains to interest-rate increases, at least in part.
Value Making A Comeback?
Financials are considered value stocks, often trading at lower prices relative to their future earnings potential. The fact that it’s known as a dividend-paying sector is also attractive to value investors, who look for underlying quality, even in a stock that’s beaten down.
Morgan Stanley’s Andrew Slimmon, in a February 2 note, said, “In the fourth quarter of 2022, value stocks started to outperform the market, and sectors such as energy, industrials, materials, and financials led. We could be in the early stages of value outperforming, though many investors don’t seem to recognize it because the memory of ‘easy’ money in uber-growth stocks is simply too tantalizing.”
Comparing Sector Risk
Investors impatient to see big returns in the short term often turn to high-growth sectors like tech, which can deliver sky-high returns but can also be more volatile than typical value sectors. It’s easy enough to compare the betas of the tech sector, at 1.30, with financials, at 0.91, to understand which poses a greater probability of downside risk.
For investors who want exposure to dividend payers that tend to be more stable, the financial sector may be worth a look, especially as the economy gradually improves, as it’s expected to do. When scouting for portfolio additions, weigh the dividend potential of a stock like Prudential, against the profitability and growth potential of an industry peer.