U.S. Markets closed

Risk-Reward Balances Principal Financial

Zacks Equity Research

We reiterate our Neutral recommendation on Principal Financial Group Inc. (PFG) as low interest rates and increasing debt and expense level dwarfs the positives.

Why the Reiteration?

Low interest rates continue to weigh on the results of Principal Financial. Net investment income has been showing a declining trend in recent years partly due to lower yields on average invested assets. Investment yields have declined. In addition to lower yields, inflation and currency-related issues in other countries affect its net investment income.

We are also concerned about escalating expenses.  A 24% hike in operating expenses drove 5% increase in total expenses in the first half of 2013. In addition, the company is also witnessing increasing debt. This, in turn, led to deterioration in debt-to-equity and debt-to-capital ratio.

Nevertheless, counting on the positives, Principal Financial’s businesses across most lines and segments continue to deliver solid results.

Principal Financial’s asset under management (:AUM) shows a steady increasing trend, driven by better results at three asset management and asset accumulation segments. Principal Financial expects total AUM to grow at 15% CAGR from $302 billion in second-quarter 2013 to $650 billion in 2018.

In order to grow inorganically, management intends to utilize a significant portion of its operating earnings for mergers and acquisitions. Over a span of three years, Principal Financial has closed seven acquisitions, adding fee-based businesses and expanding its global footprint.

Principal Financial’s capital deployment through share buybacks and dividend payment looks impressive, making it an attractive pick for yield-seeking investors. Management has set aside $400–$600 million for quarterly dividends, share buybacks and acquisitions in 2013. Share repurchases are slated for the latter half of the year, of which $405 million has already been allocated.

With respect to earnings performance, this investment manager sporting a Zacks Rank #2 (Buy) has delivered three straight quarters of positive surprises. We expect the momentum to continue when it reports its third-quarter results, riding on the strength of its increased focus on fee-based revenue sources; focus on strategic opportunities to strengthen its asset accumulation and, asset management businesses; and, an impressive inorganic growth story, among others.

Other Stocks to Consider

Investment managers Artisan Partners Asset Management Inc. (APAM) and GAMCO Investors, Inc.  (GBL), each carrying a Zacks Rank #1 (Strong Buy) and The Blackstone Group L.P. (BX), with a Zacks Rank #2 are also worth considering.

Read the Full Research Report on PFGRead the Full Research Report on APAMRead the Full Research Report on BXRead the Full Research Report on GBLZacks Investment Research