Too many private investors continue to overlook UK insurance companies despite years of strong share price growth and healthy dividend yields, while remaining far too patient with the troubled oil, supermarket and banking sectors. Should you now turn your attention to these two surprise shoot-the-lights-out stocks?
Legal & General Group(LSE: LGEN) has seen its share price grow by 125% in the past five years, almost five times the return on the FTSE 100, which is up just 27% in that time. That's despite slipping in the last year, when its share price sank 12%. L&G's recent performance has been hit by stock market volatility and falling annuity sales in the wake of pension freedom reforms. Brexit struck the biggest blow although the share price has recovered in the last five months, returning to pre-referendum levels. It has jumped 12% in the last month.
Several factors continue to work in favour of L&G. Growing numbers of investors are turning onto the benefits of low-cost passive funds, and it stole a lead in this sector long ago. Auto-enrolment is that great rarity, a successful government pension reform, which will give millions access to a workplace scheme for the first time in their lives, and L&G has 20% of the market.
Buy in bulk
Individual annuity sales may be plunging but bulk annuity sales are soaring as companies look to decontaminate their defined benefit responsibilities, and L&G is a growing in this area, in the US too. It's also building a presence in the equity release market, which should grow strongly as more cash-strapped pensioners unlock capital in their property to augment their retirement income.
The big worry is wider economic uncertainty, because if this translates into falling share prices, sentiment towards L&G will also take a hit. Another concern is that five years of double-digit earnings per share (EPS) growth will fall flat in 2017. However, at a forward valuation of 11.1 times earnings and forecast juicy yield of 6.2%, L&G still has plenty of firepower.
Asia-focused insurer Prudential(LSE: PRU) has done even better over the past five years, its share price up 153% in that time. It's up 10% in the last month, like L&G, benefitting from hopes of a Trump reflation. However, Asia is its real trump card. The Pru delivered steady 6% half-year profit growth to £2bn in the summer buts its Asia operating profit rose at 15% to £743m, while Asia new business profit grew 20% to £824m.
The insurer's geographical spread gives it a nice balance, with ageing populations in its UK and US markets requiring retirement income solutions, and the younger Asian demographics needing protection and pension plans. Asia now accounts for one-third of its profits and we can expect that to continue growing.
Prudential still doesn't look overpriced, trading at a forecast 12.5 times earnings. The dividend yield remains relatively low at 2.6% but progression has been positive, including a half-year 5% interim dividend increase to 12.93p per share. EPS are forecast to grow 13% in 2017 and Pru still looks a buy to me, although investors should consider what might happen if the China credit and property bubbles finally burst.
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Harvey Jones owns shares of Prudential. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.