Prudential Financial (NYSE: PRU) cares so much about having a solid foundation that it uses the Rock of Gibraltar as its corporate logo. That foundation is provided by a balance sheet with more than $400 billion in bonds and $21 billion in cash and equivalents, and a net equity position of more than $65 billion. In insurance terms, that means a lot can go wrong above and beyond what it’s planning for, and the company would still end up OK.
Like most insurers, Prudential makes its money from pricing risk. Ideally, inflows from premiums should at least equal outflows from policy claims. If not, the equity on its balance sheet can cover unexpected costs. The COVID-19 pandemic has heightened uncertainty, but Prudential’s balance sheet should allow it to survive long enough to understand the new risks and price future policies accordingly.
In the meantime, Prudential’s shares have dropped substantially this year because of the near-term risks it faces. That share price drop has pushed up the dividend yield recently to a whopping 6.8%. Prepandemic, dividend payments took up only about 60% of the company’s trailing earnings, leaving room for future dividend growth.
In August, management reported, “We remain on track to achieve our targeted $140 million of cost savings for the year and are making progress in transitioning our international earnings base to higher-growth markets.” Prudential deserves a closer look from income-seeking investors.
Ask the Fool
Q: Can I move my money around within my IRA, switching between different stocks and mutual funds? – B.S., Norwalk, Connecticut
A: If your IRA is held at a brokerage, you should be able to buy and sell stocks within it, and also invest in mutual funds offered by that brokerage. You may be charged regular trading commissions for such trades, but you won’t be taxed on any gains while the money is in the account. (Learn about brokerages at our sister company, TheAscent.com.)
If your IRA is with a mutual fund company, you should be able to switch between its funds, but you probably can’t invest in any individual stocks.
Q: What’s a UIT? – E.N., Watertown, South Dakota
A: It’s a unit investment trust – a kind of investment company similar to a closed-end mutual fund (which sells a fixed number of shares at its outset).
A UIT raises money from investors based on its investment strategy, typically via a one-time public offering of “units” (which are like shares). That money is invested in a portfolio of stocks, bonds and/or other securities that’s not meant to change its composition over time – in other words, the UIT is committed to those securities. That’s a plus for investors who want to own those securities, but a minus for those who prefer to have savvy fund managers buying and selling over time based on the performance of companies, changing trends and the economy. Some UIT units can be traded back to the company, but others must be held until the investment is dissolved, at a predetermined date, when proceeds are distributed among unit holders.
You can learn more about UITs by searching for the term at sites such as SEC.gov and Google.
My dumbest investment
My dumbest investment was putting 40% of my portfolio into the IPO of Snap, known for its wildly popular Snapchat app. I thought my reasoning was sound, but things didn’t work out as I expected or hoped. The experience did teach me the importance of diversifying. Fortunately, my portfolio was small at the time, and the lesson proved very valuable. – T.C.B., online
The Fool responds: It’s not a bad idea to avoid all initial public offerings, or IPOS, of newly public companies, giving their shares a few months or a year to settle down – and wait for the companies to release several quarters’ worth of financial statements for review. Many times, insiders and connected folks are the ones who get to buy shares at the IPO price, while others end up buying after an initial surge.
Snap’s shares popped on their first trading day, closing at $24.48, 44% above their IPO price of $17. But only a few got to buy at $17. Because of pent-up demand, the shares started trading at $24, leaving many early investors with gains closer to 2%. A little over a year later, shares fell below $11. (New stocks are often volatile: Facebook shares gained less than 1% on their IPO day, while Twitter shares soared more than 72%.) Today, bullish investors like Snap’s persistent popularity with young people and its growing revenue and usership, while doubters worry about its unprofitability and competition.
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