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Why Prudential Financial Is a Retiree's Dream Stock

Retirees face a particular challenge when it comes to investing. With the potential of decades of life ahead of them, they need to be invested in stocks to help cover their long-term needs. Yet as retirees, they have precious little earned income to use to replenish their savings if an investment goes bad. That makes it crucial for retirees to pay close attention to the stocks they own and select ones that have a high likelihood of success over time.

A great company for retirees to consider is one that has a solid balance sheet to enable it to navigate through tough times. It also pays a well-supported dividend to give a retiree much-needed cash without requiring that retiree to sell shares. In addition, it has enough growth prospects to give that retiree good reason to believe an investment will be able to at least keep up with inflation over time. With those reasons in mind, here is why Prudential Financial (NYSE: PRU) may be close to a retiree's dream stock.

The Rock of Gibraltar

Image source: Getty Images.

A rock-solid balance sheet

When it comes to balance sheet strength, Prudential Financial stakes its reputation on it. Indeed, for well over a century, it has used the Rock of Gibraltar as its corporate symbol, precisely to project that strength. It backs that boasting up with a lot of cold, hard cash and high-quality investment assets. In its last quarterly report, Prudential Financial indicated it had over $21 billion in cash and equivalent on hand, along with over $400 billion in bonds among its assets, with a net equity over $65 billion.

Prudential Financial is in the insurance business, which basically means its job is to put a price on risk. When things are going well, it can earn a fair return on its risk pricing activities. When things go poorly, on the other hand, well, that's why it has that rock-solid balance sheet. With that kind of equity available to it, a lot can go wrong above and beyond what it already priced into its policies and it still can wind up OK overall. In uncertain times like these, that should provide great comfort for investors.

A well-supported dividend

A row of jars with increasing amounts of coins and growing plants

Image source: Getty Images.

Prudential Financial pays a dividend of $1.10 per share per quarter, or $4.40 per year. Even in the craziness that is 2020, that dividend represents less than half of what the company is expected to earn for the year. That suggests that the company has the ability to keep its dividend flowing, which should provide that much needed cash. At a recent share price of $69.32, that dividend offers investors a whopping 6.3% yield.

While Prudential looks well situated to keep its dividend flowing during the COVID crisis, it is important to note that it did cut its dividend during the financial crisis. That cut only lasted a short while, and by 2010, its dividend was back at pre-crisis levels. That behavior bodes well for investors with a long term time horizon, as it suggests that the company prioritizes its survival over its dividend but is willing to restore its dividend once it reasonably can.

It also showcases the importance of having an asset allocation plan that does not rely on stocks to cover your near term needs. If you were counting on that dividend to pay your bills, the fact that it came back quickly didn't really help you much in that brief window when it wasn't available to you. If, on the other hand, you were using its dividend to help with longer-term goals or replenishing your shorter-term savings, then you were much less affected by its short term dividend reduction.

A path to growth over time

Over the past few years, Prudential Financial has been able to clock in at around a 7% annualized growth rate. In part because ogf a COVID-related hiccup, its growth is expected to slow to just below 4% over the next few years. While that's not exactly the fastest growth trajectory in the world, it is faster than recent and expected near-term inflation rates.

Indeed, as an insurance company, Prudential has a reasonable chance of being able to grow at least in line with inflation over time. After all, people's and companies' insurance needs tend to be based on the cost of replacing whatever it is that they're insuring. The more the value they need to insure, the higher the premiums Prudential can justify charging. While not a guarantee that its business will keep up with inflation, it's certainly a nice embedded reason to believe the company can do so.

A business that deserves consideration by retirees

In all, Prudential Financial has a good combination of a solid balance sheet, a well-supported dividend, and a reasonable path to growth over time. That combination makes it worth considering by retirees as part of their stock allocation.

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Chuck Saletta owns shares of Prudential Financial and has the following options: short March 2021 $75 puts on Prudential Financial, short March 2021 $100 calls on Prudential Financial, short January 2022 $100 puts on Prudential Financial, and long January 2022 $100 calls on Prudential Financial. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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