EUR 850.00 For Business Accounts Only

Morningstar | Prudential’s 4Q Is a Little Weak

Prudential’s fourth-quarter results were challenged in some areas. Adjusted operating income declined 12% year over year, and saw a bigger decline from earlier results in 2018. However, we view a certain level of quarter-to-quarter volatility as par for the course for this no-moat franchise. The annualized operating ROE of 10.3% for the quarter was not overly impressive, but we view the 12.7% for the full year as a reasonable result in light of current capital market conditions. We will maintain our $118 fair value estimate.

On a year-over-year basis, all of the company’s operating segments saw a decline in adjusted operating income. However, this was partially offset by a decline in corporate costs, due to a fall-off in compensation tied to the performance of the company’s stock and the broader equity market.

The investment management business had been a bright spot for Prudential earlier in the year, but reported results took something of a turn for the worse in the fourth quarter, although we think the company is still performing reasonably well given the direction of the market. This business is the only area within Prudential that we believe might benefit from an economic moat, and as such we think it is a key segment to watch. Adjusted operating income fell 21% year over year. During the quarter, overall net inflows were $9 billion, but Prudential saw $3.1 billion in net outflows in third-party assets. We view third-party assets as more critical, but would note that the company was only pushed to net outflows due to a single institutional client outflow of $9 billion, so this looks to potentially be an outlier. In the near term, we think market volatility could dampen results in this area, but with 97% of the assets under management outperforming their benchmarks over a trailing five-year period, Prudential looks relatively well-positioned.

This quarter was the debut for new CEO Charles Lowrey, who recently took over for John Strangfeld, who had led the company since 2008. Given that the company went with an internal hire, we do not expect any major strategic shifts. Although Lowrey has only had the CEO position for a short period and could still be working through his approach, his comments on the call largely hinged on the positive aspects of Prudential’s culture, which suggests he is not looking to make major changes. Though we think Prudential’s performance in the post-crisis period has been mixed, we like that the company has largely charted a fairly steady, conservative course. We appreciate the fact that Prudential has largely avoided the temptation to follow its peers and aggressively expand in higher-growth markets, as we are skeptical that this growth will be value-creative in the long run.