My shares in Prudential plc (LON: PRU) (LSE: PRU.L) have not quite performed as I had hoped. In the last three months alone they have fallen by 17% and this has left me feeling disappointed. That’s because I still feel the company has huge long term potential and that it has absolutely the right strategy, but I’m nevertheless left a little frustrated with its recent share price performance.
As far as I can tell, there are two main reasons for its share price fall. Firstly, Prudential has large exposure to the Asian economy and with the investment world becoming less bullish/more bearish on the prospects for China in particular following its continued GDP growth slowdown, Asia-focused stocks seem to be a lot less popular.
Secondly, Prudential could refresh its strategy after a number of senior management changes. Although I feel the current strategy is very sound, it is not uncommon (and entirely understandable) for a fresh pair of eyes to have a different viewpoint on how a business should be run. I think this could be holding back investor sentiment, although I must admit that Prudential’s falling share price is probably due more to reason one rather than reason two.
Although I’m still very optimistic regarding China’s growth prospects and the potential for a diversified financial services provider such as Prudential to increase its sales in the region, other investors may take time to warm to Prudential’s investment case.
Still, with Prudential having a prospective yield of 3.5%, at least I’m picking up a decent level of dividends in the meantime. My yield is admittedly slightly lower than that, but I’m bullish on the prospects for fast rises in dividends in future years because Prudential has a payout ratio of only 37%. This indicates to me that it could raise dividends at a faster rate than EPS growth for a number of years and still have enough cash to reinvest for future growth.
Prudential’s valuation also makes me feel upbeat regarding its capital gain prospects. It has a P/E of 11.3 and this falls to 10.4 on a prospective basis, which highlights the potential for a higher rating further down the line. China is an obvious catalyst to cause this, but I feel that it could take years rather than months for this to show through via a higher share price for Prudential.
However, as a very long term investor I have the time to allow Prudential to come good. In spite of its disappointing share price performance in recent months, I’m still confident in its long term outlook.
The author owns shares in Prudential at the time of writing.