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Principal Financial Rides on Robust Portfolio & Liquidity

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Principal Financial Group, Inc. (PFG - Free Report) is well-poised to gain from strong retirement solutions and improved liquidity position.

Factors to Note

The company continues to benefit courtesy of robust retirement, insurance and asset management solutions, which have resulted in a strong portfolio of products and services. Inclusion of Wells Fargo’s Institutional Retirement and Trust (IRT) business in 2019 has also contributed to revenues. As a result, the top line has witnessed a CAGR of 9.1% in the past five years (2014-2019). However, Principal Financial expects group benefits premiums and retirement recurring deposits to be impacted during the remaining year, primarily owingto the COVID-19 pandemic affecting employment and contributions to employee benefit plans.

Furthermore, Principal Financial has consistently undertaken efforts to enhance product offerings. The company’s unit Principal Global Investors recentlylaunched the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI), which will enable investors to get access to qualified dividend income. It has also been entering into merger and acquisitions (M&A) to boost portfolio. However, M&A opportunities are likely to slow down till 2021 due to the pandemic-induced financial turmoil.

Moreover, the company has been proactive in taking measures to reduce the financial crunch of its clients during this market volatility. It has extended deadlines for premium payments. Principal Financial has also halted rate increase on a temporary basis for group benefits customers. Also, the company boasts of a solid asset management business riding on its extensive distribution footprint, best-in-class solutions and operational discipline.

Additionally, the company improved liquidity position has led to a strong balance sheet. Its total debt to total capital of 22.5% lies below the industry’s average of 34.5%. Principal Financial generated $300 million of net cash flow in the first-quarter 2020, which benefited from positive flows in Brazil, Mexico and Hong Kong and marked the 46th straight positive quarter.

By virtue of its robust capital position, the companyalso engages in effective capital deployment. Its dividend yield of 5.2% compares favorably with the industry’s figure of 3.2%, thus making the stock an attractive pick for yield seeking investors.

Notably, the Zacks Consensus Estimate for earnings for the second quarter has been revised upward by 2.4% over the past 30 days.

However, shares of this Zacks Rank #3 (Hold) company have lost 23.4% in a year compared with the industry’s decline of 6.7%. Escalating expenses, which are likely to put pressure on margin expansion, remain a concern. Notably, in first-quarter 2020, net margin contracted 120 basis points (bps) sequentially and 310 bps year over year.

Nevertheless, we believe that the company’s strong fundamentals are likely to drive its shares going forward.

Stocks to Consider

Some better-ranked stocks in the finance space include Cboe Global Markets, Inc. (CBOE - Free Report) , Raymond James Financial, Inc. (RJF - Free Report) and LPL Financial Holdings Inc. (LPLA - Free Report) . While Raymond James sports a Zacks Rank #1 (Strong Buy), Raymond James and LPL Financial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CBOE Global offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (ETPs) and global foreign exchange (FX). It beat estimates in each of the trailing four quarters, with the average positive surprise being 8.24%.

Raymond James engages in the underwriting, distribution, trading, and brokerage of equity and debt securities, and the sale of mutual funds and other investment products in the United States, Canada, and Europe. It has a trailing four-quarter positive earnings surprise of 8.70%, on average.

LPL Financial is a clearing broker-dealer and an investment advisory firm that acts as an agent for its advisors, on behalf of their clients, by providing access to a broad array of financial products and services. It beat estimates in each of the trailing four quarters, the average positive surprise being 9.51%.

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