Principal Financial Stock Lags Industry: Should You Hold or Fold?

Shares of Principal Financial Group, Inc. PFG have gained 0.8% in the past year, underperforming the industry's growth of 11% and the Zacks S&P 500 composite's rise of 14.4%.

PFG Lags Industry and S&P

Image Source: Zacks Investment Research

Earnings per share missed the consensus estimate in the last two reported quarters of 2024.

Closing at $79.30 on Tuesday, the stock stands almost 10.1% below its 52-week high of $88.26.

The Zacks Consensus Estimate for PFG's 2024 and 2025 earnings has moved 0.2% and 0.3% south, respectively, in the past 30 days.

Principal Financial's expenses have been increasing since 2013 due to a rise in benefits, claims and settlement expenses, as well as operating expenses. An increase in expenses weighs on its margins. Net margin contracted 280 basis points to 8.1% in the second quarter of 2024.

Factors Benefiting PFG Stock

Principal Financial's revenue growth is expected to improve in the long run, riding on higher premiums and other considerations, fees and other revenues, and improved net investment income across its segments.

The Principal International segment is likely to benefit from higher single-premium annuity sales in Chile. The segment's operating earnings should gain from foreign currency tailwinds.

The Specialty Benefits Insurance business should continue to gain from record sales, strong retention and employment growth. Growth in the business, favorable claims and disciplined expense management should benefit its pre-tax operating earnings.

Strong institutional flows across equities, real estate and specialty fixed income, highlighting the value of diversified distribution through its institutional, retail and retirement channels, are likely to drive positive net cash flow. Principal Financial's extensive distribution footprint, strategic buyouts and operational discipline should enhance the assets under management growth.

Principal Financial boasts a strong capital position, with sufficient cash generation capabilities and liquidity. To reflect the business mix and risk profile, PFG lowered the target RBC level from the previous 400% to a range of 375-400%. For 2024, PFG remains well-positioned to deliver on enterprise long-term financial targets, with 9% to 12% growth in earnings per share and 75% to 85% free capital flow conversion.

PFG's Distribution of Wealth

Principal Financial's wealth distribution through share buybacks and dividend payment looks impressive. In the third quarter of 2023, PFG raised the dividend by 11% for the fifth consecutive quarter, aligned with the targeted 40% dividend payout ratio, demonstrating confidence in continued growth and overall performance. It also boasts a solid dividend yield of 3.6%, higher than the industry average of 2.4%. The company continues to expect to deliver on the targeted 75-85% free capital flow for 2024.

PFG returned more than $415 million of capital to shareholders in the second quarter of 2024, including $250 million of share repurchases. It remains committed to returning excess capital to shareholders and continues to expect $1.5-$1.8 billion of capital deployment for 2024, including $800 million to $1.1 billion of share repurchases. Based on net income, excluding exited business, the company targets 35-45% share repurchases in 2024.

Estimates for Principal Financial

The Zacks Consensus Estimate for Principal Financial's 2024 earnings per share indicates a year-over-year increase of 11.6%. The consensus estimate for revenues is pegged at $15.81 billion, implying a year-over-year improvement of 7.8%.

The consensus estimate for 2025 earnings per share and revenues indicates an increase of 15.4% and 4.6%, respectively, from the corresponding 2024 estimates.

PFG's Favorable Return on Equity

PFG's return on equity in the trailing 12 months was 14.9%, better than the industry average of 9.7%, reflecting efficiency in utilizing shareholders' funds.

PFG Shares Are Affordable

Principal Financial is trading at a discount compared with the industry average. It presents a compelling investment opportunity with its attractive forward 12-month price-to-earnings ratio of 9.8X, lower than the industry average of 14.82X. Also, it has a Value Score of A.

Shares of other accident and health insurers like Affiliated Managers Group, Inc. AMG, Ameriprise Financial, Inc. AMP and Apollo Global Management Inc. APO are also trading at a discount to the industry average.

Wrapping Up: Keep On Holding

Principal Financial's financial stability, favorable growth estimates and affordability of shares make it an attractive stock to retain for current investors. 
PFG should benefit from strategic buyouts, strong retention, higher single premium annuity sales, effective capital deployment, positive net cash flow and favorable return on capital. It is, therefore, wise to hold on to this Zacks Rank #3 (Hold) stock.

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