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We have retained our Neutral recommendation on Principal Financial Group Inc. (PFG - Analyst Report) as the low interest rate environment and rising expenses might weigh on the company’s performance. The investment manager currently carries a Zacks Rank #3 (Hold).

Why Reiteration?

Principal Financial’s businesses across most lines and segments continue to deliver solid results. The company’s asset under management (AUM) portrays an uptrend driven by better results at three asset management and asset accumulation segments. We expect that the company’s extensive distribution footprint, best-in-class solutions and operational discipline will help it support AUM growth going forward.

Principal Financial also follows an inorganic route to ramp up its growth profile. Management intends to utilize a significant portion of its operating earnings for mergers and acquisitions.

Principal Financial’s capital deployment through share buybacks and dividend payment looks impressive, making it an attractive pick for yield-seeking investors. Management has set aside $400–$600 million for quarterly dividends, share buybacks and acquisitions in 2013, with share repurchases slated for the latter half of the year.

On a tepid side, low interest rates continue to weigh on the results of Principal Financial. Net investment income has been showing a declining trend in the recent years, partly due to lower yields on average invested assets. We are also concerned about the company’s increasing debt.

A surge in fees and other revenues along with an increase in asset under management aided Principal Financial to deliver operating earnings of 79 cents per share in the last reported quarter. Operating earnings exceeded the Zacks Consensus Estimate by 5.33% and improved 11.3% year over year. In addition, a lower share count buoyed the bottom line. The Zacks Consensus Estimate for the second quarter is pegged at 82 cents, translating to a year-over-year improvement of 14.5%

Other Stocks to Consider

We prefer to remain on the sidelines for Principal Financial. However, SEI Investments Co. (SEIC - Analyst Report) with Zacks Rank #1 (Strong Buy) looks attractive. Among other stocks, Ameriprise Financial, Inc. (AMP - Analyst Report) and Artisan Partners Asset Management Inc. (APAM - Snapshot Report) both with a Zacks Rank #2 (Buy), are also worth considering.

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