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Is Primerica, Inc.'s(NYSE:PRI) Recent Stock Performance Tethered To Its Strong Fundamentals?

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Simply Wall St
·4 min read
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Primerica's (NYSE:PRI) stock is up by a considerable 12% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Primerica's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Primerica

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Primerica is:

21% = US$386m ÷ US$1.8b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Primerica's Earnings Growth And 21% ROE

To start with, Primerica's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.0%. Probably as a result of this, Primerica was able to see a decent growth of 14% over the last five years.

As a next step, we compared Primerica's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.8%.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is PRI worth today? The intrinsic value infographic in our free research report helps visualize whether PRI is currently mispriced by the market.

Is Primerica Using Its Retained Earnings Effectively?

Primerica's three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, Primerica has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 19% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

Overall, we are quite pleased with Primerica's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.