Prudential declares special dividend and puts Asia fears to bed

Final results from Prudential showed pre-tax profit falling short of expectations but a bumper dividend and reassuring words from chief executive Mike Wells on the outlook in the UK, US and Asia helped lift the shares on Wednesday morning.

Although total revenue fell 31% to £41.3bn due to much lower investment returns offsetting higher gross premiums earnings, operating profits rose 22% to £4.0bn, partly helped by a one-off £339m benefit from slimming down the UK life business to reflect the new Solvency II regulations.

Profit before tax increased 20% to £3.2bn, though this was lower than the consensus estimate of £3.6bn, with earnings per share up 16% to 101p.

Directors brought investors firmly back on side by adding a special dividend on top of a full-year dividend that was only hiked 5% to 38.78p per share - slightly below the consensus. The special dividend of 10p per share was thanks to the one-off management action in the UK business.

Of its three main geographic areas, the UK life business generated the strongest growth in operating profit, up 60% to £1.2bn, though the M&G investment arm endured a 1% decline to £442m.

The Asia life and asset management segment delivered a 17% increase to £1.3bn, with growth from both sides of the business. In the US, Jackson life contributed 10% growth to £1.7bn.

"The fundamentals of the group remain compelling, our opportunities are intact and we are in an enviable position to benefit from the attractive structural and demographic opportunities in Asia, the US and the UK," said Wells.

"The disciplined execution of our strategy, underpinned by the cash generating nature of our business, positions us well to be able to continue to deliver high-quality products and services to our 24m customers and long-term profitable growth to our shareholders."

On the outlook, Wells said that while the current macroeconomic uncertainty and market instability clouded the near-term outlook, creating a headwind for Prudential's fee-based businesses, the group's progress "continues to remain underpinned by the structural demand for regular premium savings and protection products in Asia".

The continued strong growth of the middle classes in the region mean savings and insurance demand underpins prospects for the long-term he assured.

"The high quality, recurring nature of our income and the scale and diversity of our pan-regional platform position us well to smooth out the inevitable country level fluctuations to deliver value across the cycle."

For the UK, while M&G's asset management has been facing headwinds, mainly from negative outflows due to the rotation out of bonds, it remains a well regarded brand and the life business has adapted deftly to the changing pensions market.

Regulations are also due to hit the US business but Wells alluded to contingency plans now in advanced stages "which are designed to underpin our future prospects for both earnings and cash".

Analyst opinion

Societe Generale said the headline numbers looked "strong", with operating profit coming in 10% ahead of consensus, though only beating forecasts by 1% if the one-off management action in the UK is stripped away.

The French broker, reaffirmed its 'buy' rating on the stock but highlighted potential risks in future if the Hong Kong and Singapore dollars remove their US peg, leading to currency depreciations. Other risks are further capital controls by the Chinese government, deterioration in the UK and US credit environment, particularly its exposure to US energy, and finally significant US hedge losses exceeding risk pricing.

Shore Capital said it was a "quite remarkable set of results" in the face of regulatory and economic headwinds across the globe.

"The UK performance was particularly impressive, to us, leaving aside the one-off, and demonstrates the value latent within this business," analysts wrote. "The 15% growth from Asia should assuage the fears amongst some commentators over the recent turmoil in that region and its possible impact on Pru’s delivery."

SocGen observed that Pru's Solvency II position remained highly robust, that free surplus generation and cash remittance figures were equally impressive, and that the group remained on target to deliver against its new 2017 targets for cash and profits in Asia and group cash.