Prudential – A high-quality dividend growth stock I have my eye on

When it comes to high-quality FTSE 100 companies, it’s hard to look past Prudential (LON: PRU) (PRU.L).

The largest insurer in the index has a current market capitalisation of £47bn, and the stock has been a fantastic performer over the long term, rising 130% before dividends in the last five years alone.

The company currently serves over 24 million customers across the UK, the US and Asia.

Compelling long-term story

When investing with a long-term investment horizon, it pays to seek out companies that have strong tailwinds driving revenue growth. And in my opinion, it’s Prudential’s exposure to Asia that provides a compelling opportunity.

Wealth is growing at a formidable rate across this region, yet exposure to life insurance and savings / investment products remains low. As such, Prudential, with 14.6 million customers in 12 countries across Asia, looks well-placed to capitalise.

Prudential Asia

Source: Prudential.co.uk

At the same time, Prudential is in a good position to benefit from a strong demand for retirement products from ageing populations in both the UK and the US.

Dividend growth champion

Prudential has a strong dividend growth track record, having increased its dividend payout every year since 2004. Over the last five years, the payout has increased from 25.2p to 43.5p per share, a compound annual growth rate (CAGR) of a strong 11.5%, and city analysts expect further growth of 8% this year and next. With the company generating basic earnings per share of 75p last year, dividend coverage was an adequate 1.7 times.

However, after a near 30% rise in the share price over the last year, Prudential’s trailing dividend yield now looks a little underwhelming at present, in my view. Indeed, looking at this graphic from Stockopedia, we can see that the current yield of 2.37% is very close to the five year low.

Prudential dividend

Source: Stockopedia

Patience required

For this reason, I’m going to hold off on buying Prudential for now, as I prefer to buy stocks with dividend yields over 3.5%.

Prudential shares don’t look overly expensive right now, on a forward looking P/E ratio of 13.2, however, with a little patience, I believe I’ll be able to pick up the stock with a slightly higher dividend yield.

Disclosure: Edward Sheldon, CFA has no position in Prudential.   

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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