I am quite impressed with the share price performance of Principal Financial Group in the past twelve months. It's price has consistently increased from around $25 per share in Jun 2012 to $38.20 per share at the time of writing. Since the beginning of the year, Principal Financial Group has also outperformed the S&P 500 with nearly 34% gain. Should we invest in Principal Financial Group at its current price? Let’s take a closer look.
Principal Financial Group is considered the leader in global investment management industry, providing both institutions and individuals insurance solutions and retirement services. Around $575.1 million, or 61% of the company's total operating earnings, were generated from the Retirement and Investor Services segment. The Principal International segment ranked second, with $153.3 million in earnings while the U.S. Insurance Solutions and Principal Global Investors segment contributed $138.2 million and $81.2 million, respectively, in operating earnings in 2012.
What I like about Principal Financial Group is its diverse customer base, with 18.3 million customers in 18 countries. Its Retirement and Investor Services segment could be considered the leader in DC plans, the number one provider of both DB plans and ESOP plans. According to Principal Financial Group’s presentation, its net flow as the percentage of assets is much higher than the industry net flows. In 2012, the company’s net flows accounted for 7% of the assets while the industry average was only 1%. For the Principal International segment, the company would like to expand its footprint globally, especially in key emerging markets in Asia and Latin America, capitalizing on large and growing middle class. In the full year 2013, the Principal International would grow its earnings share from 16% to 23% of the total company’s operating earnings.
Decent growth but relatively expensive among its peers
In the first quarter of 2013, the revenue of all four business segments experienced decent growth. The company's asset under management (AUM) reached the record high of $456 billion, thanks to an additional $34 billion AUM from its Cuprum acquisition. Its normalized operating earnings increased by 8%, from $0.72 per share in the first quarter last year to $0.78 per share this year. For the full year, its earnings per share was expected to grow as much as 24%. Principal Financial Group is trading at $37.60 per share, with the total market cap of $11 billion. The market values the company at 10.2 times its forward earnings and 1.15 its book value.
Compared to its peers including AXA Group (NASDAQOTH: AXAHY) and Lincoln National Corporation , however, Principal Financial Group is the most expensively valued among the three.
AXA Group moving in to China
AXA Group is trading at around $20.30 per share, with the total market cap of $48.20 billion. The market values AXA at a much cheaper valuation, at only 7.45 times its forward earnings and 71% of its book value. AXA has been trying to expand its footprint in China. Recently, it announced that it would acquire 50% of Tian Ping Auto Insurance Company Limited. According to the agreement, AXA would acquire 33% stake from current Tian Ping’s shareholders for around RMB 1.9 billion and subscribe to a capital increase for RMB 2 billion to invest to the company’s potential growth. The existing P&C insurance operation of AXA would be integrated into the company’s new joint venture in China. With Tian Ping’s P&C licenses and direct distribution license, AXA would expect to expend its P&C presence in China. Moreover, it could leverage the direct distribution channel for motor insurance.
Lincoln National with consistent share buybacks
Lincoln National is also cheaper than Principal Financial Group. It is trading at $35.50 per share, with the total market cap of $9.5 billion. The market values Lincoln National at only 7.1 times its forward earnings and only 0.64 times its book value. In the first quarter 2013, Lincoln National generated around $239 million in net income, a bit lower than the net income of $243 million in the first quarter last year. However, its earnings per share came in at $0.86, 4.8% higher than the earnings per share of $0.82 in the first quarter of 2012. The growth in earnings per share was attributable mainly to the reduction in the number of total shares outstanding. The share count has declined from 296 million last year to only 279 million this year. In the investor meeting, the company said that an additional $150 million worth of shares had been repurchased. The company expected that it would spend total $400 million to buy back its shares in 2013.