ii view: shares rally as Prudential beefs up share buybacks

Capital management update

• Launching a US$2 billion share buyback to be completed by no later than mid-2026
• First $700 million tranche to be completed by no later than 27 December 2024
• Continues to expect the total 2024 dividend payment to grow by between 7% and 9% 

Chief executive Anil Wadhwani said: 

"I am pleased with the progress we continue to make in executing our strategy, as we drive towards generating growth in both value and cash returns for shareholders over the long term. The significant growth opportunity ahead of us has not changed and we remain focused on realising that opportunity."

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ii round-up:

Asia and Africa savings and assurance focused company Prudential (LSE:PRU) today announced plans to return $2 billion to shareholders via share buybacks by mid-2026.

That beat City hopes of around $1.8 billion, with the news coming ahead of first-half results pencilled in for 28 August, which is when an announcement on buybacks was expected to be made. A first share buyback tranche of $700 million begins immediately and is expected to finish by 27 December.

Shares in the FTSE 100 company rose 6% in UK trading having come into this latest news down around 20% year-to-date. UK and Canada focused Aviva (LSE:AV.) is up by 10% in 2024, while the FTSE 100 index is up 7%. 

Prudential sells protection products including life assurance, health insurance and saving related products, along with providing asset management services to its customers. 

Second-quarter sales trends had remained in line with the first quarter, with management still expecting the total 2024 dividend payment to grow by between 7% and 9% 

Pru’s historic focus on "with profit" savings, unit-linked and health and protection business gives it a relatively low volatility of free surplus assets to market stress events, with the company targeting a free surplus ratio of 175-200%.

A free surplus ratio of 242% as of the 2023 year-end and allowing for 2023’s second interim dividend now enables it to return the $2 billion to shareholders by mid-2026.

City estimates for a free surplus ratio of 228% by the full year 2027 could potentially see it returning a further $2 billion to shareholders. 

Broker UBS reiterated its ‘buy’ stance on the shares post the news. 

ii view:

Headquartered in Hong Kong, the FTSE 100 constituent company operates across 24 markets including China and is listed on stock exchanges in London, Hong Kong, Singapore, and New York. Management strategic focuses include improving the experience of its customers in dealing with Prudential, powering the distribution of its products via the use of technology, and transforming its health insurance related business to push at least a doubling in profits from 2022’s $275 million. 

For investors, heightened geopolitical tensions between the West and China cannot be overlooked, with Hong Kong the group’s biggest single country of profit generation during 2023 at close to $1 billion. Competition across its markets persists, with customer retention retreating to 86% in 2023 from 89% the year before. Costs for businesses generally remain elevated, while the forecast dividend yield of around 2.5% compares to over 7% for Aviva, Legal & General Group (LSE:LGEN) and Phoenix Group Holdings (LSE:PHNX).  

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To the upside, this latest news regarding planned share buybacks sees Prudential attempting to redress the balance between its own and shareholder returns and those of rivals. Returns via share buybacks are arguably easier to adjust than those via dividends. Its strategic plan has seen selling agent numbers rise to 68,000 in 2023 from 66,000 a year earlier, while the use of AI in sifting its data banks is expected to help create new sales leads. 

In all, and despite increased global geopolitical tensions, particularly in relation to China, a consensus analyst fair estimate of £12 per share indicates longer-term optimism in the City. 

Positives: 

• Refreshed strategy
• Expose to high growth economies

Negatives:

• China geopolitical tensions
• Potential currency headwinds 

The average rating of stock market analysts:

Buy