Why I'd buy Prudential plc along with this 6% yielder

The 'boring but safe' picture of the insurance world was shattered by the financial crisis, when some respected big names were badly overstretched and had to slash their dividends.

But nothing like that happened to the well-named Prudential(LSE: PRU), which has always kept its dividend yields modest but very well covered, and has maintained a healthy low-risk balance sheet. And though shareholders only pocketed a 2.5% yield last year, there are two factors that I think make Prudential a great investment.

One is its steadily growing earnings which have contributed to a climbing share price. EPS has soared by 60% over the past four years, leading to a share price rise that has left the FTSE 100 in its wake -- Prudential shares are up 80% over five years, with the Footsie up only 12%.

Beating inflation

Then there's the progressive nature of the dividend, which has seen the annual payment rocket by 40% between 2013 and 2017. That's way ahead of inflation, and analysts predict further progressive rises.

With full-year results delivered last week, the Pru said its "capital generation is underpinned by our large and growing in-force business portfolio, and focus on profitable, short-payback business." And that makes me happy the cash will keep flowing.

The big news is that the firm is to capitalise on its success in Asian markets by splitting itself into two -- M&G Prudential focusing on the UK and Europe, and Prudential PLC to continue business in Asia, the US and Africa. 

With the shares on forward P/E multiples of only around 11.5 to 12.5, I'd be happy to hold the existing Prudential today, and I'd be just as happy to own shares in the two demerged companies.

Big yield

In many ways, Personal Group Holdings(LSE: PGH) is quite a contrast to Prudential. Its share price hasn't done anywhere near as well recently, barely beating the FTSE 100 over five years with a 14% gain. But it's been paying a significantly higher dividend, with yields breaking 6%.

The firm provides employee benefits, including short-term accident and health insurance, and counts Royal Mail Group as a high-profile customer.

Revenue for 2017 declined from £53.6m to £45.2m, but that was expected and was due to the delayed roll out of its salary sacrifice scheme at Royal Mail (due to an HMRC review of salary sacrifice).

That led to a modest drop in EBITDA, from £11.4m to £10.8m, but that was better than expectations. And Personal Group ended the year with a healthy rise in cash on its books, up from £12.6m to £16.2m, and with no debt.

Cash cow

The dividend was lifted by 3.2% to 22.7p per share, for that yield of 6% on Tuesday's close of 377p.

Impressive though the company's progress has been, I reckon it could be only beginning to tap its long-term growth potential. Chief executive Mark Scanlon spoke of "the significant opportunity presented by the employee services market, which is being driven by increasing competition for staff in a tight labour market and recognition of the commercial value of investing in and retaining staff."

When my colleague Rupert Hargreaves spoke about the company in January, the shares were on a forward P/E of 18, but since then the share price has retreated to drop that ratio 15.7. I think that's good value for a 6% yielder with tempting growth potential.

Buy-And-Hold Investing

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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