Building Synergies In Retirement And Asset Management Will Drive Future Client Outcomes

Key Takeaways

• Strategic synergies in retirement and asset management, along with SMB market leadership, could enhance revenue growth through integrated solutions and expanded offerings.
  
• Expansion in private and multi-asset solutions, plus shareholder returns via buybacks and dividends, signals strong free cash flow and supports EPS growth.
  
• Foreign exchange volatility, demographic trends, and competitive pressures impact revenue, growth, and profitability across various segments and markets for the company.

Catalysts

Provides retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide.

• Principal Financial Group is focusing on building synergies between its retirement ecosystem and global asset management, which could enhance revenue growth through cross-selling and integrated solutions. This strategy is expected to positively impact revenue and margins.
  
• The company is leveraging its leadership in the small and midsized business (SMB) market to deepen market penetration and expand offerings, pointing towards potential revenue growth from a large, growing customer base.
  
• Recent strategic wins, such as the large retirement investment mandate and expanding its suite of target-date fund offerings, are set to drive top-line growth and margin improvement as these efforts align with evolving market demands.
  
• Principal Financial Group's expansion in private and multi-asset solutions is expected to lead to stronger client outcomes and increased net flows in asset management, thereby supporting higher earnings and revenue growth.
  
• The continued share buyback program and increasing dividend payouts reflect an expectation of strong free cash flow generation, which is likely to enhance earnings per share (EPS) growth.

Principal Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Principal Financial Group's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $9.93) by about March 2028, up from $1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, down from 12.0x today. This future PE is lower than the current PE for the US Insurance industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 3.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

Principal Financial Group Future Earnings Per Share Growth

Risks

• Foreign exchange rates negatively impacted AUM by $28 billion for the full year, causing potential volatility in net revenue and earnings due to FX exposure.
  
• There is a risk of negative net cash flows in retirement services due to demographic trends of retirees withdrawing funds, impacting revenue and potential growth within the sector.
  
• Rising equity markets may create pressures on net flows and fee revenue rates as high market performance can lead to increased withdrawal rates, affecting net margins and earnings.
  
• The specialty benefits segment faces competitive pressures, particularly in dental, leading to potential pricing challenges and impacting profitability and net margins.
  
• International operations, such as in Hong Kong, face regulatory changes that can impact business strategies and could potentially reduce revenue growth in those markets.

Valuation

• The analysts have a consensus price target of $87.615 for Principal Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $99.0, and the most bearish reporting a price target of just $74.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.1 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 6.5%.
• Given the current share price of $83.24, the analyst price target of $87.62 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.