We reiterate our Neutral recommendation on
Principal Financial Group Inc
) 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
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
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
Artisan Partners Asset Management Inc
GAMCO Investors, Inc
), each carrying a Zacks Rank #1 (Strong Buy) and
The Blackstone Group L.P
), with a Zacks Rank #2 are also worth considering.
ARTISAN PTNR AM (APAM): Free Stock Analysis
BLACKSTONE GRP (BX): Free Stock Analysis
GAMCO INVESTORS (GBL): Free Stock Analysis
PRINCIPAL FINL (PFG): Free Stock Analysis
To read this article on Zacks.com click here.