In a concerted effort to enhance value for its shareholders, the Board of Directors of Principal Financial Group Inc. (PFG - Analyst Report) , announced a 17% increase in its dividend. Following the announcement, Principal Financial will now pay a quarterly dividend of 21 cents per share, up from 18 cents paid on June 29, 2012. The enhanced dividend will be paid on September 28 to shareholders of record as of September 6.
The new authorization not only reiterates Principal’s continued focus on returning more value to shareholders but also emphasizes the inherent strength of its liquidity. Also, increased focus on fee based business enables the company to return more earnings to shareholders.
Principal Financial, on the back of its operational strength, continues to generate healthy cash flows, which in turn supports the company’s strategic investments. Thus, it remains on track to utilize $800 to $900 million of excess capital in 2012.
Principal Financial’s annualized dividend yield of 3.1% is much higher than the industry average of 1.5% and that of its nearest peer, Lincoln National Corp. (LNC - Analyst Report) , with an annualized dividend yield of 1.3%.
Shares of Principal Financial rose on the announcement. It is likely that continuous efforts on the part of the company to boost shareholders' value has reinstated investor confidence and hence helped the share price move higher.
In addition to dividends, the company also actively buys back shares. In the second quarter, it repurchased 5.4 million shares, bringing the year-to-date tally to 7.2 million. The Board also approved buy back of shares worth $200 million.
There was no upward movement in estimates over the last 7 days. However, we believe the news of sharing more profits with shareholders might encourage analysts to pull their estimates upward. The Zacks Consensus Estimate for third-quarter 2012 is 75 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.95 and $3.36 per share.
Given $1.5 billion in excess capital, we expect more such strategic actions, which in turn will enhance operational performance and shareholder value.
We retain our Neutral recommendation on Principal Financial. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the stock over the near term.