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Analyst Blog

On Jun 20, we issued an updated research report on Principal Financial Group Inc. .

Principal Financial’s first-quarter earnings surpassed the Zacks Consensus Estimate as well as year-ago number on improved top line. Increased focus on fee-based businesses along with improved investment income aided top-line growth.

Fee-based revenue sources have been helping the company earn steadily and return capital to its shareholders through share buybacks and dividends. Moreover, a fee-based business model limits exposure to the interest rate environment.

Principal Financial recently hiked its dividend by 14%, with the yield coming in better than the industry average. With this, the dividend has increased at a 2-year CAGR of 53%. The company also has a new $200 million share buyback program under its authorization. This Zacks Rank #2 (Buy) investment manager expects to deploy $500–$700 million for quarterly dividends, strategic acquisitions and share buybacks as well as to deleverage its balance sheet. Over the long term, Principal Financial estimates spending 65% to 70% of net income in such activities.

The company’s assets under management (AUM) shows a steadily increasing trend driven by better results at its asset management and asset accumulation divisions. Principal Financial expects total AUM to grow at 15% CAGR from $302 billion in second-quarter 2013 to $650 billion in 2018.

Though investment income witnessed improvement in the last quarter, given the continued low interest rate environment we wait to see its sustainability. In addition, we also we wait to see if the company remains successful in deleveraging its balance sheet. Nonetheless, cash balance continues to witness a decline.

Solid quarterly results prompted an increase in the Zacks Consensus Estimate for 2014 and 2015. The estimate for 2014 is currently pegged at $4.10, up 5.7% over the last 60 days as most of the estimates moved north. The same for 2015 also increased 3.3% to $4.37 as most of estimates were revised higher over the same time frame. The expected long-term growth rate for the stock is 11.7%.

Other Stocks to Consider

Investors interested in investment managers may also consider stocks like Ameriprise Financial, Inc. , Brookfield Asset Management Inc. and GAMCO Investors, Inc. . All these stocks share the same Zacks Rank as Principal Financial.

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