Prudential plc's (LON:PRU) dividend yield is well below that of rival UK insurers but anlaysts believe its growth potential makes it an attractive investment.
The company today raised its full year dividend by 12% to 43.5p per share from 38.78p the previous year as its chief executive Mike Wells sounded a confident outlook and the company reported a 7% increase in 2016 operating profit to £4.3bn from £3.9bn a year earlier.
However, the dividend yield - a measure of the dividend per share against the value of shares - stood at about 2%.
Prudential said it aims to grow the ordinary dividend by 5% per year. Much of Prudential’s growth potential is being driven by Asia where there is a rising middle class population, which has an increasing need for insurance. With Brexit expected to impact its UK business, its Asia business may mitigate any damage.
“As emerging market populations become increasingly wealthy, the protection products Prudential offers become increasingly attractive – especially as many nations haven’t developed the kinds of welfare states commonly found in Europe,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.
“The long term products that Prudential sells, be it health or life insurance, should mean that once recruited, customers offer income streams for years or even decades to come.”
Sector peer Aviva plc (LON:AV. last week in its full year results revealed the company plans to return excess cash to investors and pay more dividends.
Aviva’s chief executive Mark Wilson said: “Aviva's results are simple and clear cut: more operating profit, more capital, more cash, more dividend. And there is more to come.”
The full year dividend was lifted 12% to 23.3p each from 20.8p as operating profit rose 12% to £3.0bn from £2.7bn. The dividend payment represents a yield of about 5%, much higher than that of Prudential.
The figures for 2016 follow efforts to streamline the business. Aviva has rid its stake in Dutch insurer Delta Lloyd, exited Russia, the US and Malaysia as well as snapped up up Friends Life for £5.6bn.
As a result it has bolstered its capital position. The Solvency II capital surplus increased 16% to £11.3bn from £9.7bn the prior year.
“Successful balance sheet transformation allowing more capital returns is simply reinvigorating interest, creating a rush among investors who like the sound of, not just special dividends and a generous 5% yield, but the potential for the shares to rally another 6% to 2015 highs of 578p,” said Michael van Dulken, head of research at Accendo Markets.
Legal & General Group plc (LON:LGEN) increased its final dividend for 2016 to 10.35p from 9.95p, raising its full-year payout by 7% to 14.35p, up from 13.4p in 2015. The dividend yield was about 4%.
The hike in the dividend last week came as the group issued a positive outlook and reported an 11% increase in operating profit to £1.7bn from £1.4bn.
Chief executive Nigel Wilson said: “We look forward to the future with confidence as our core markets are growing, our market share is increasing, our balance sheet is strong and we have positive cash and earnings momentum.”
Shore Capital analyst Eamonn Flanagan said Legal & General reported a “strong set of results for 2016” with the cash balance better than it had expected and the dividend and operating profits broadly in line.
Barcalys said: "We believe L&G can benefit from structural trends in retirement (pensions de-risking), asset management (shift from active to passive) and increased infrastructure spend, which will allow the company to grow the dividend by mid to high single digit levels through 2021. With 11% upside to our target price of 282p and an attractive and growing yield of 5.6%, we reiterate our 'overweight' rating."
Standard Life, which last week agreed the terms of its £11bn all-share merger with Aberdeen Asset Management, in February said it raised its total dividend for the year by 8% to 19.82p from 18.36p in 2015.
The market had been expecting the dividend to be raised to 19.74p and it represented a dividend yield of about 5%.
Operating profit before tax climbed 9% to £723mln from £665mln in 2015.
Chief executive Keith Skeoch said despite industry head-winds, the company expects to benefit from its strengthening brand and strong long-term relationships with a diversified range of clients and customers.
“The acquisition of Elevate has strengthened our leading position in the advised platform market while the increase in the stake in HDFC Life and the proposed combination with Max Life will increase our exposure to the attractive and fast growing Indian market,” he said.
However, some analysts have voiced concerns over its planned merger with Aberdeen.
Berenberg said it believes the merger offers “little upside, but substantial risk” following struggles at Aberdeen. Aberdeen recorded its 15th consecutive quarterly outflow of assets of £10.5bn in the three months to 31 December.
Standard Life will buy Aberdeen for £3.8bn to create the UK's largest fund manager with assets under management of more than £660bn.
The merged company is reportedly set to cut 1,000 jobs and make overall savings of about £200mln for Aberdeen.
“We believe that the benefits, if any, rely more on a major change in fortune for Aberdeen’s funds than they do on any cost savings, and the level of disruption that could be caused to Standard Life’s business is high,” Berenberg said.
“The risk/reward profile for Standard Life shareholders has become skewed to the downside, in our view.”
Berenberg downgraded the stock to ‘hold’ from ‘buy’ and cut the target price to 380p from 400p
Jefferies also cited its concerns on the merger as it cut its rating to ‘hold’ from ‘buy’ and reiterated at 398p target price.
The broker said: While the deal is earnings per share accretive, the three-year integration period is likely to be dominated by uncertainty with synergies unlikely to be recognised in the short term.”