Prudential Financial: A Profitable Inflation Hedge

Prudential Financial (PRU) is a provider of financial services in the U.S. and internationally. The company furnishes insurance, management of investments, and other financial products to institutions and individuals. I am bullish on PRU stock.

Solving the Inflation Headache

Inflation is surging in the United States. In 2019 inflation was running a tad under 2%. Fast-forward to 2021, and the rate is nearing 7%, causing major concerns for families and investors. One dollar today only buys about 92% of what it could have purchased just two years ago. Investors must keep pace to realize net gains.

One way to do this is to invest in a company that could perform better in a rising interest rate environment. When inflation is high, the Federal Reserve will raise interest rates in an attempt to moderate it.

A company like Prudential will make more money with higher interest rates due to the nature of its revenues. Prudential makes much of its revenue through short-term and long-term investment positions, which will benefit tremendously from higher rates.

Prudential also has a strong balance sheet that it stress tests in case of a sudden market decline, interest rate shock, insurance shock, or other market emergencies. The company hedges certain assets, maintains a capital-rich balance sheet, and has credit facilities that it believes would stand up to extreme negative events.

This prudent management likely contributed to the company’s stock price recovering quickly after the initial pandemic panic in March of 2020.

Return of Capital to Shareholders

Another way to hedge inflation is by purchasing a company that returns capital to the shareholder. This can come in two forms; dividends and share buybacks. Prudential is currently paying out $1.15 per quarter, or just over a 4.3% yield. In addition, the dividend has been raised each year since 2008. Over the past 10 years, its dividend CAGR has been around 10%.

Prudential supplements the dividend payments with share repurchases. The company has repurchased $2.1 billion worth of its stock so far in 2021. This is about 5% of the current market cap. This tax-deferred return of capital, along with the dividend, has easily outpaced the high inflation of 2021. Prudential is prolific when it comes to repurchasing shares, having bought over $5 billion worth since 2019.

The stock price has also appreciated more than inflation over the prior 12 months. Prudential has gained about 39% so far in 2021, although it has struggled over the last 30 days along with the overall market. The stock is currently 5% off its 52-week high, which offers investors a reasonable entry point, in my opinion.

Revenues have also returned after a brief slowdown in 2020. In 2019, total revenue came in just shy of $65 billion. This dipped to just $57 billion in 2020; however, it has risen to over $70 billion over the trailing twelve months (TTM). Operating income has also increased from $5.1 billion in 2019 to over $8.8 billion over the TTM.

Wall Street’s Take

Turning to Wall Street, Prudential yields a Hold consensus rating, based on six Hold ratings and no Buys or Sells. The average Prudential Financial price target of $114 implies 5% upside potential.

Making the Right Moves

Investors often look at assets other than stocks to use as inflation hedges. Some prefer gold, while others have even suggested bitcoin. There are no perfect hedges. Certain equities, high-quality and high-yielding dividend stocks like Prudential, can also make great investments during inflationary periods.

Prudential will make more money in a rising interest rate environment. The company also returns a ton of capital to shareholders through stock buybacks and an increasing dividend. With PRU stock being 5% off its highs, coinciding with an overall market dip, it may be a great entry point for long-term investors to take a position in the stock.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.