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Prudential Stock and Valuations Rose on Retirement, International

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Nov. 30 2016, Updated 8:04 a.m. ET

Weak performance

Prudential Financial (PRU) has maintained its dividend yields in the range of 2.0%–3.0% over the past few years. It has also more than doubled its stock over the past five years. Both of these factors could provide a good investment option for long-term investors.

PRU stock has risen 26.0% in the past six months, mainly due to improved operating performance, return on net investments, and the expanding retirement business. In 3Q16, the company saw adjusted operating income of $2.66 per share compared to $2.40 in 3Q15. Its International Insurance business was boosted by strong underwriting margins and investment returns in the quarter, partially offset by a strong dollar.

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Valuations

Prudential Financial is an insurance and asset management conglomerate that targets higher risk-adjusted returns for shareholders and investors. Insurance companies are generally valued on the basis of their book values. Prudential Financial is currently trading at a one-year forward price-to-book multiple of 0.7x. Its competitors are trading at an average of 0.9x.

At its current price-to-book multiple of ~0.8x, Prudential Financial is trading cheaper than other insurers such as Allstate (ALL) and Chubb (CB). However, it’s trading at a premium compared to major players such as American International Group (AIG) and MetLife (MET). Both are trading at ~0.7x.

Prudential Financial is trading at 9.8x on a one-year forward price-to-earnings basis, compared to the industry average of 10.7x for the same period. The stock is trading at a discount to its book value, which reflects growth prospects on an expectation of strong operating performance.

Prudential is facing competition in its US Individual Life segment and has seen falling performance over the past few quarters. However, it’s been more than compensated by its retirement and international businesses. Prudential’s targeting of its retirement segment will be beneficial as more people enter retirement.

Investors can gain exposure to insurance companies by investing in financial sector ETFs such as the Financial Select Sector SPDR ETF (XLF).

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