We continue to retain our Neutral recommendation on Principal Financial Group (PFG) as the low interest rate continues to weigh on the results and adoption of deferred acquisition cost guidance will lower 2012 operating income and also lower retained earnings.
Counting on the positives, Principal Financial has been targeting the emerging markets to expand its business as they offer ample growth opportunities. The acquisitions made by the company will help it to add to its emerging market investment capabilities through the launch of new emerging market products and strategies in a broadened platform and strengthen Principal’s global equity capability.
The company estimates operating earnings growth of 15-20%. With a broadened platform and a suite of diversified products, we expect Principal Financial to capitalize on the opportunities as and when they arise.
Principal Financial has been generating substantial shareholders' return via share repurchases and dividends. Year-to-date, the company bought back 16.8 million shares, out of which 9.1 million shares were repurchased in the third quarter.
Given $1.8 billion of excess capital, we expect to see further buybacks from the company, which will boost shareholder return. As part of the company’s strategy to deploy $1 billion in either returning value to shareholders or grow its business, recently, the company authorized another $100 million share buyback program.
Principal Financial’s assets under management (AUM) grew 5% year over year to $320.8 billion as of September 30, 2011 driven by better results at three asset management and asset accumulation segments. We believe the company is positioned on the back of its extensive distribution footprint, best-in-class solutions and operational discipline to continue to deliver solid operating results.
On the flip side, a low interest rate continues to weigh on the results. Net investment income, over the last few years, partly, declined due to lower yields on average invested assets and the third quarter of 2011 was no exception to it. Principal estimates 2012 operating earnings would be affected by 1-2% if the low interest rate environment continues to persist. The impact may increase by 3-8% in that case.
Starting 2012, Principal will adopt the deferred acquisition cost (DAC) guidance. The guidance encompasses that incremental direct costs of contract acquisitions only can be postponed while other costs will be incurred as they arise. Principal estimates the adoption of DAC guidance will lower 2012 operating earning by $35 to $45 million.
The company also stated that Full Service Accumulation and Individual Life will be mostly impacted while Individual Annuities, Principal International and Specialty Benefits division will face less of an impact. Principal also estimates that retained earnings will be lowered by $550 to $750 million.
The Zacks Consensus Estimate for fourth-quarter 2011 is 74 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.80 per share and $3.14 per share.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries. It competes with Lincoln National Corporation (LNC).
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