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The sell-off in the Prudential (LSE: PRU) share price over the past few years has surprised even me. The ‘univestable’ tag placed on China (one of its biggest market) didn’t help. But if there is one thing that I have learnt over the years, is that quality businesses with strong moats make compelling investing propositions.
Growing momentum
When a company embarks on a new strategy, as Prudential did 18 months ago, there are always execution risks. However, over the past few quarters, it’s becoming increasingly apparent to me that the business is heading in the right direction.
For the three months ended 31 March 2025, the business continued where it had left off with its 2024 full-year results. New business profit was up 12% to $608m. Annual premium equivalent, (which enables insurance companies to compare upfront single premiums with regular ones) rose 4% to over $1.6bn.
China and Hong Kong remain its key markets. In particular, it has proved very adept at capturing new business from Mainland Chinese visitors to Hong Kong. It continues to innovate on this front. For example it recently launched a new multi-currency savings product.
Structural growth drivers
The main reason why I continue to remain bullish on the stock, relate to significant structural growth opportunities. By 2033, the total addressable market for Asian gross written premiums is predicted to reach $1.6trn. That completely dwarfs any other comparable market.
One key driver of this growth is shifting demographics. By 2040, 28% of China’s population will be aged over 60. However, life insurance penetration rates are in low-single-digits across all its key markets, creating an extraordinary opportunity, in my opinion.
In its annual Global Wealth Report, UBS analysts estimate that there’s over $150trn of household wealth across Asia. A growing middle class is leading to a greater awareness of and need for wealth management solutions. With an impressive agency network, the firm is well placed to profit from this burgeoning market.
Risks
The growing rift between the US and China, and associated tariffs is one of the key risks facing the business today. The effect of protectionist policies on its core markets aren’t at all clear.
Its diversified investment portfolio has cushioned it somewhat from the Chinese property bubble implosion. However, in a potential future market environment where every asset class goes down in tandem, its portfolio of investments would fall dramatically, thereby weakening the balance sheet. The imposition of tariffs on President Trump’s ‘Liberation Day’ highlights that this remains a distinct possibility.
Dividends
Although Prudential doesn’t offer the kind of market-beating returns of Aviva and Legal & General, the depressed share price has pushed up the dividend yield to 2%. The dividend per share (DPS) grew 13% last year and the company is expecting it to grow 10% this year. That’s pretty impressive for a stock that I view more as a growth share than an income one.
With positive momentum, meeting its 2027 target of growing new business profit at a compound annual rate of 20% is highly achievable. If it does so, then I think the price can rise and DPS should grow substantially so I will have locked in a solid, if not spectacular, yield. That is why I have been adding more shares to my portfolio in the last few weeks.
