One of the reasons to surf each the earnings calendar is that you may discover a company you’ve never heard of — and of course, a potential new investment.
That’s what happened this week as I stumbled across Principal Financial Group Inc (NYSE:PFG). To my surprise, I’d never heard of this $11 billion company, but given its 4% dividend yield at the time, I knew I wanted to do some research.
So, here’s what you should know about PFG stock:
Let’s Get to Know PFG
It’s important to recognize that Principal Financial Group is a business that has taken different forms since 1879, but it has always focused on financial services. What I love is that PFG operates in the more lucrative areas of financial services: retirement, asset management and insurance products.
Principal Financial Group has a retirement and investor segment that provides a huge range of products in both the individual and business side of retirement portfolio planning. These clients may be individuals or institutional. So if your business is offering 401k, 403b, defined benefit pension, nonqualified executive benefit and employee stock ownership plans … well, Principal Financial Group can be the provider. That also means it isn’t a stretch to offer things like annuities, mutual funds and other bank products.
PFG also operates internationally, with pension and asset management products. It also sets up what some countries call “voluntary savings plans” in Brazil, Chile, China, Hong Kong, India, Mexico and the Southeast Asia. Basically, these are just more retirement and long-term investment products.
Back in the U.S., Principal Financial Group has a robust life insurance business, and extends into specialty benefits like group dental, vision and disability.
It’s this kind of broad offering, both domestic and international, that I like.
Digging Into Principal Financial’s Numbers
Principal Financial Group did recently deliver earnings that actually missed Wall Street estimates and struggled in year-over-year comparisons. Fourth-quarter net income came in at $254 million, down 5% from last year’s $270 million. For the fiscal year, net income was $1.209 billion, but that was up 12% from $1.11 billion last year. Operating revenues fell 3% year-over-year in Q4 but were up 14% for the full year.
Obviously, investors are wondering if this is a seasonal or temporary issue given how strong the whole year was.
Full-year net cash flows came to $23 billion. Specialty benefits had record sales of $314 million and record retention, which I suspect is due to the underwhelming offerings of the Affordable Care Act, and the fact that these benefits are so difficult to obtain for regular people.
Principal is no slouch. The company beat its own chest in its release:
“Outstanding investment performance, with 88 percent of Principal’s investment options in the top two Morningstar quartiles on a one-year basis, 89 percent in the top two quartiles on a three-year basis and 93 percent in the top two quartiles on a five-year basis at year end.”
Should You Buy PFG?
What I see is a quality operation with a long history that is facing tougher times in a difficult macroeconomic environment.
However, net cash flows are good and the company is on solid footing. PFG reiterated its dividend, which has grown from 18 cents quarterly to its current 38-cent payout in just four years.
Principal’s payout yields 4.3% after Tuesday’s earnings-fueled slide. That’s a lot more than what most insurance companies pay out. Lincoln National Corporation (LNC), for example, is a $9.7 billion company with a 2.5% yield. You have to climb into something like Prudential Financial Inc (PRU) to get a 4% yield. Prudential trades at 9 times earnings … and PFG trades at a little bit less.
Principal Financial isn’t an everyday name, but it is worth considering if you want a sustainable dividend and legacy insurance business and don’t have one in your portfolio.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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