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