Principal Financial Group Inc. (PFG) is aligning its business in order to focus more on growing asset accumulation and asset management businesses. It also remains on track to deploy $800–900 million in 2012, in either returning value to shareholders or in merger and acquisitions.
However, the low interest rate environment continues to remain a drag. We thus retain our Neutral recommendation on the company.
To enhance focus on the strategic opportunities in the growing asset accumulation and asset management businesses, it exited the medical insurance segment. This business has been on a declining trend over the past several years. Principal Financial’s assets under management grew 9% year over year to $367.1 billion as of June 30, 2012, driven by better results at three asset management and asset accumulation segments.
The company intended to deploy $800–900 million in 2012, in either returning value to shareholders or in merger and acquisitions. As such, its Board approved a $200 million share buyback program in May and hiked dividend by 17% in August. It has nearly $400 million left to be utilized.
Also, increased focus on fee based business enables the company to return more earnings to shareholders. Principal has a dividend yield of 3.1%, higher than the industry yield of 1.5% and way above that of its nearest peer, Lincoln National Corp. (LNC), with a yield of 1.3%. Nevertheless, the company intends to lower the excess capital by $300–$400 million over the next few years.
Additionally, the company scores strongly with the rating agencies. Rating affirmations or upgrades from credit rating agencies play an important part in retaining investors’ confidence in the stock as well as maintaining creditworthiness in the market.
On the flip side, low interest rate continues to weigh on the results. Net investment income, in the second quarter experienced lower net investment income largely attributable to lower investment yields in U.S. operations and lower inflation-based investment returns on average invested assets and cash resulting from lower inflation in Chile.
Furthermore, Principal Financial adopted deferred acquisition cost guidance starting 2012. It estimated the adoption to lower 2012 operating earnings by $35 to $45 million.
Principal Financial currently holds a Zacks Rank #4 (Sell), indicating slight downward pressure on the stock in the near term.
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