Prudential plc (PRU) Ordinary 5p

Prudential has announced a $2bn share buyback programme. The group has also set out a target operating range of 175%-200% for its free surplus ratio, its preferred measure of balance sheet strength.

At the end of 2023 this stood at 242%, which underpinned confidence for the new buyback. Expectations for dividend growth this year remain at 7-9%.

Trends in Prudential’s annual premium equivalent (APE) sales in the second quarter have been similar to the 7% underlying growth seen in the first three months of the year. The company also expressed confidence about this year’s levels of new business growth.

The shares were up 6.3% following the announcement.

Our view

A hefty shareholder return plan in the form of a $2bn buyback, and reasonably robust second quarter trading, has given Prudential a bit of a lift.

Zooming further out, the reopening of the China-Hong Kong border helped Prudential's performance last year, boosting demand for its products. This is especially good news for Hong Kong operations, which boast a market-leading position for products aimed at visitors from mainland China. The average number of visitors from China is now ahead of pre-pandemic levels. But that strong performance last year is acting as a tough comparator, and continuing Chinese economic headwinds could remain a drag on the valuation

The product mix has shifted, with higher rates meaning savings products are taking a bigger chunk of the pie. More recently we're starting to see that shift back toward the higher margin health and protection business, a trend that would be beneficial if it continues.

Medium-term initiatives are evolution rather than revolution and include $1bn of investment across several core areas including technology, and creating a more joined-up customer approach across the product ranges.

Looking further ahead, the broader Asian and Indian regions should benefit from long-term economic development. In Asia, insurance uptake is low and in many cases state provisions for pensions and social security are limited. India offers lots of potential in the health insurance space. With 1.4bn people and around half of all health expenses being covered by disposable cash, there's an opportunity to shift the dynamic more toward insurance policies.

Prudential also has a massive asset management business, Eastspring, which manages close to $240bn of assets. It offers a host of investment solutions as well as managing premiums generated from the life insurance business. Improving market dynamics mean retail investors are moving back to higher margin equity funds.

Capital levels are strong, and the group’s committed to increasing the dividend 7-9% over the next couple of years. Nothing is guaranteed.

The new strategy brings with it some bold goals, growing new business profit by 15-20% won't be easy but should conditions remain supportive there's plenty of opportunity ahead. This isn't a high yielder like some of its UK listed peers, but Prudential's Asian focus and higher growth opportunities give a different option for a UK investor.

But that can be a double-edged sword. Asian exposure has been out of favour for some time and evolving dynamics in China could act as a longer-term lag on valuations.

Environmental, Social and governance (ESG) risk

The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.

According to Sustainalytics, Prudential’s management of material ESG issues is strong.

Prudential trains sales employees annually on responsible marketing and has strong policies for data privacy and security. The company invests in digital products to enhance customer experience but does not disclose customer complaint details. While it offers thorough training on ethics and corruption, and also provides whistleblower protections, Prudential lacks ethical risk assessments in investment and product development.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Previous Prudential plc updates