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We have retained our Neutral recommendation on Principal Financial Group Inc. (PFG - Analyst Report) as the low interest rate environment is expected to weigh on the positives of the company. The provider of an expansive range of retirement savings, investment and insurance products and services currently carries a Zacks #3 Rank (Hold).

Why Reiterate?

There was no earrings momentum over the last 30 days. Principal Financial is scheduled to release its fourth quarter and full year 2012 results on February 1 after the closing bell.  The Zacks Consensus Estimates for the fourth quarter and 2012 are currently pegged at 75 cents per share and $2.62 per share, respectively. The estimates translate into a year-over-year increase of nearly 5% for the fourth quarter, while a decline of 5% for 2012.

The third quarter experienced lower net investment income largely attributable to lower investment yields in the U.S. operations and lower inflation-based investment returns on average invested assets and cash resulting from lower inflation in Chile. Earlier, Principal estimated the 2012 operating earnings to be affected by 1%–2%, if the low interest rate environment persists. The impact may increase by 3%–8%, if it persists longer.

Nevertheless, counting on the positives, Principal’s assets under management continues to show strong improvement. It grew 22% year over year as of September 30, 2012 driven by better results at its three asset management and asset accumulation segments.

The company also made progress in its Cuprum deal. In December, it initiated a bid to acquire AFP Cuprum S.A. for $1.39 billion. This acquisition will not only widen its presence in the emerging marketplace but also marks the sixth transaction in the past two years that increases its focus on fee-based business.

Principal Financial continues to increase shareholders value. For 2013, the company intends to utilize $400–$600 million for quarterly dividends, strategic acquisitions and share buybacks. Till November 2012, Principal Financial had spent $2.1 billion in share buybacks, dividends and acquisitions. The company also strongly scores with the credit rating agencies.

Other Stock to Consider

Although we have a cautious stance on Principal Financial, other stocks like Enstar Group Ltd (ESGR - Snapshot Report) and Radian Group Inc. (RDN - Snapshot Report), which carry a Zacks #1 Rank (Strong Buy), are worth considering.
 

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