Principal Financial Beats Earnings; Ups Div & OKs Buyback - Analyst Blog

With operating net income of $1.06 per share reported for the first quarter of 2014, Principal Financial Group, Inc. PFG has successfully managed to keep its positive surprise streak alive. Earnings outperformed the Zacks Consensus Estimate by 15.2% marking the sixth straight quarter of positive earnings surprise. Moreover, earnings improved nearly 34.2% on a year-over-year basis.

Including net realized capital losses of 8 cents, and adjustment for redeemable non-controlling interest of 3 cents, net income available to common stockholders was 95 cents per share, up 56% year over year.

Increased focus on fee-based businesses along with improved investment income, driving an upsurge in the top line, more than offset the escalation in expenses, thereby aiding solid results at Principal Financial.

Behind the Headlines

Operating revenues in the first quarter increased 12% to $2.5 billion. A 16% rise in premiums and other considerations, a 13.1% increase in fees and other revenues and a 6.5% improvement in net investment income drove the upside.  Revenues outpaced the Zacks Consensus Estimate by about 4%.

Total expense incurred by Principal Financial increased 8% year over year to $2.1 billion. Increase in benefits, claims and settlement expenses, commissions, depreciation & amortization, and compensation and other accounted for the rise in expenses.

Principal Financial's assets under management in the quarter were a record $495.5 billion as of March 31, 2014, up 9% year over year.

Book value per share as of March 31, 2014, stood at $30.81, up 6% year over year.

Segment Update

Retirement and Investor Services: Revenues in the quarter improved nearly 14.4% year over year to $1.26 billion.

Operating earnings increased 27% year over year to $216.5 million.

Principal Global Investors: Revenues in this segment amounted to $171.1 million, 11.3% higher than the prior-year period, driven by higher management fees due to AUM growth and higher borrower and transaction fees.

Operating earnings increased 32% year over year to $26.9 million. The improvement came primarily on the back of improved revenues and better margins.

Principal International: Revenues were $300.4 million in the quarter, up 21.4% year over year, driven by the Cuprum addition and the growth in AUM from positive net cash flows.

Operating earnings surged 42% year over year to $63.3 million in the quarter. Earnings benefited from the Cuprum acquisition, though strengthening of the U.S. dollar weighed on the upside.

US Insurance Solution: Revenues were $804.4 million in the reported quarter, up 3.4% year over year.

Operating income was $43.4 million, up about 36% year over year.

Corporate: Operating loss narrowed to $33 million from a loss of $37.3 million recorded in the first quarter of 2013.

Dividend and Share Repurchase Update

The board of directors of Principal Financial approved a 14% hike in its quarterly dividend. The increased dividend of 32 cents per share will be paid on June 27 to shareholders of record of June 9.

Principal Financial also paid a dividend of 28 cents per share on March 8.

With respect to share repurchases, the board approved the company to buy back $200 million worth of its shares. It bought back more than $72 million worth of shares in the first quarter.

Results of Few Other Investment Managers

T. Rowe Price Group, Inc. TROW reported its first-quarter 2014 net income of $1.05 per share, beating the Zacks Consensus Estimate by 3 cents. Moreover, this significantly outperformed the year-ago earnings of 91 cents.

BlackRock, Inc.'s BLK first-quarter adjusted earnings of $4.43 per share surpassed the Zacks Consensus Estimate of $4.11 and were up 21% from $3.65 per share earned in the year-ago quarter.

The Blackstone Group L.P.'s BX first quarter 2014 economic net income ENI of 70 cents per share surpassed the Zacks Consensus Estimate by 25%. Also, the figure was up 27% from 55 cents reported in the prior-year quarter.

Our Take

With this quarter, the investment manager delivered six straight quarters of positive earnings surprises.

Increased focus on fee-based revenue sources helped Principal Financial earn steady income and return capital to its shareholders through dividends, or deploy the same in strategic acquisitions.  Principal Financial remains focused with a capital deployment target between $500 and $700 million.

Given the strategic acquisitions that the company has undertaken, its inorganic growth story also looks attractive.

Principal Financial also noted that business model diversification coupled with successful execution of investment management strategy sustained the growth momentum for the investment manager.

Principal Financial presently carries a Zacks Rank #3 (Hold).