AIA is ramping up capital returns. Prudential is promising an update on capital management. Could Pru return more cash to investors - and if so, how much?
The context: a renewed focus on capital returns following disappointing share performance
Prudential''s TSR has underperformed the Hang Seng and the European insurance index by 28% and 44% respectively since the start of 2023, and 20% against each YTD alone. In this context, capital returns become more attractive. AIA, Prudential''s close peer, which has also suffered from poor relative TSR, has announced a new capital management policy including both a one-off return of excess capital and higher run-rate distributions. Pru has now promised a capital management update in the next few months. What could they say?
What could Pru do? One-off distribution of excess capital + higher run-rate capital returns
Pru has been reticent about returning capital, given the reinvestment opportunities. And it''s possible the new communication will provide more detail on reinvestment opportunities, rather than new news on distributions. But there is potential for two types of capital return action: i) the utilisation of the c.USD4bn stock of excess capital; ii) an increase in run-rate distributions. On the former we now forecast USD2bn of buyback. On the latter, the challenge is that the USD1bn investment programme will limit distribution capacity for the next few years. But in ''27+, we think the company could increase the dividend by 60% if it wanted to push the envelope - without having to compromise on growth.
Sounds good, but does it change the equation? Still not obvious that it''s cheap
On our forecasts, Pru could manage a 5% 2027 div yield. But even at this level, it''s not obviously cheap: we show that, for instance, AXA could synthesize annual DPS growth of 8% with a c.5% div yield today - and AXA likely has a lower CoE than Pru. Now, our forecasts could be proved conservative; and the company could improve...
