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Principal Misses at Both Ends

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Principal Financial Group Inc. (PFG - Free Report) reported second quarter 2012 operating earnings of 72 cents per share, lagging the Zacks Consensus Estimate by 2 cents. Earnings improved 1.4% from 71 cents earned in the prior-year quarter. Operating income was $216.3 million in the quarter, down 5.5% from $229 million in the second quarter of 2011.

The year-over-year improvement was primarily due to weak results at Retirement and Investor Services and Principal Global Investors. However, better performances at Principal International and US Insurance Solution were partial offsets.

Including net realized capital losses of $39.2 million or 13 cents per share and an unfavorable after tax adjustment of $4 million or 1 cent per share, net income available to common stockholders was $173.1 million or 58 cents per share, compared with $217.3 million or 67 cents per share a year ago.

The prior-year quarter included net realized capital gain of $23.5 million or 7 cents and other unfavorable after-tax adjustments of $35.2 million or 11 cents.

Operational Performance

Operating revenues in the second quarter crawled up 1.8% to $2.14 billion. The rise was primarily due to an increase in premiums and other considerations and fees and other revenues, partially offset by lower net investment income. Revenue failed to meet the Zacks Consensus Estimate of $2.16 billion.

Principal in the second quarter reported a year-over-year increase of 14.3% in premiums and 4.8% increase in fees and other revenues.  Net investment income decreased 8.4% year over year.

Total expenses escalated 3.4% year over year to $1.85 billion. Higher benefits, claims and settlement expenses, commissions, compensations primarily contributed to the increase.

Assets under management were $367.1 billion as of June 30, 2012, up 9% year over year.

Book value per share as of June 30, 2012, stood at $28.18, up 4% from $27.08 as of June 30, 2011.

Segment Update

Retirement and Investor Services: Revenues in the quarter increased by 3.5% to $1.08 billion from $1.04 billion in the year-ago quarter.

Operating earnings slid to $141.7 million in the quarter from $154.7 million in the second quarter of 2011.

Principal Global Investors: Revenues in the quarter were $141.1 million, 3.5% higher than the prior-year period.

Operating earnings were $18.2 million in the reported quarter compared with $20.8 million in the year-ago quarter. The decrease was due to higher compensation cost arising from an increase in the number of staff in the distribution and investment wing to support the company’s growth strategies.

Principal International: Revenues were $210.6 million in the quarter, modestly higher than $227.2 million in the prior-year quarter, largely driven by strengthening of the U.S. dollar.

Operating earnings inched up $36.9 million from $36.3 million in the year-ago quarter, mainly due to a growth in assets under management.

US Insurance Solution: Revenues improved to $751.5 million in the quarter from $730.7 million in the year-ago quarter.

Operating earnings increased to $50.2 million in the quarter from $49.2 million in the year-ago quarter.

Corporate: Operating losses narrowed to $30.7 million from a loss of $31.8 million recorded in the year-ago quarter.

Dividend and Share Repurchase

Principal Financial repurchased 5.4 million shares at an average price of $25.52. The year-to-date shares repurchased totaled 7.2 million.

During the quarter, the board also approved buy back of shares worth almost $200 million.

The company also paid a quarterly dividend of 18 cents per common share on June 29, 2012.

Our Take

We believe that Principal Financial is aligning its business to focus more on the strategic opportunities in the growing asset accumulation and asset management businesses while shedding the line of business, which provides little scope for growth.

The company’s sound capital position and financial liquidity are supportive of its expansion policies in the emerging markets as they offer ample growth opportunities. Also, it scores well with the rating agencies.

Principal Financial remains on track to deploy $800–900 million in 2012 in either returning value to shareholders or in merger and acquisitions.  Given sufficient amount in excess capital, we expect it return further value to its shareholders going forward.

However, low interest rate environment continues to remain a drag.

We retain our long term Neutral recommendation on Principal Financial. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates slight downward pressure on the shares over the near term.

Lincoln National Corporation (LNC - Free Report) , which competes with Principal Financial, is scheduled to release its results on August 1, 2012 after the bell. It also carries a Zacks #4 Rank.


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