Principal Financial Group Inc. Quarterly Valuation – July 2014 $PFG

Principal_LogoIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Principal Financial Group (PFG) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Principal Financial Group, Inc. (PFG) is a provider of retirement savings, investment and insurance products and services. As of December 31, 2011, the Company had approximately 18 million customers. PFG’s United States and international operations concentrate primarily on asset accumulation and asset management. PFG offers a range of individual and group life insurance, individual and group disability insurance, and group dental and vision insurance. It focuses on small and medium-sized businesses providing an array of retirement and employee benefit solutions. The Company operates in four segments: retirement and investor services, principal global investors, principal international, and United States insurance solutions. PFG’s corporate segment consists of the assets and activities that have not been allocated to any other segment. As of December 31, 2011, it owned 26 properties in Des Moines, Iowa, and in various other locations. In February 2013, it acquired AFP Cuprum S.A.

PFG Chart

PFG data by YCharts

Defensive Investor – must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend - PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $50.18
MG Value $66.67
MG Opinion Fairly Valued
Value Based on 3% Growth $45.21
Value Based on 0% Growth $26.50
Market Implied Growth Rate 3.80%
PEmg 16.09
PB Ratio 1.42

Balance Sheet – 6/30/2014

Total Debt $2,529,400,000
Total Assets $218,322,300,000
Intangible Assets $2,503,800,000
Total Liabilities $207,920,500,000
Outstanding Shares 293,800,000

Earnings Per Share

2014 (estimate) $4.18
2013 $2.95
2012 $2.57
2011 $2.15
2010 $2.06
2009 $1.97
2008 $1.63
2007 $3.01
2006 $3.63
2005 $3.02
2004 $2.64

Earnings Per Share – ModernGraham 

2014 (estimate) $3.12
2013 $2.50
2012 $2.21
2011 $2.08
2010 $2.18
2009 $2.38

Dividend History

PFG Dividend Chart

PFG Dividend data by YCharts


Principal Financial Group is suitable for the Enterprising Investor as the company passes all of the investor type’s requirements, but is not suitable for the Defensive Investor as it has shown insufficient growth in earnings over the last ten years.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Aflac Inc. (AFL).  From a valuation side of things, the company appears fairly valued after growing its EPSmg (normalized earnings) from $2.18 in 2010 to an estimated $3.12 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 3.80% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Principal Financial Group (PFG)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Principal Financial Group (PFG) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

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