Principal Financial: Shares Retreat To Support Ahead Of Earnings (NASDAQ:PFG)

Value, Quality, and Dividend were the best-performing global styles last year. One high-dividend stock, a key holding in a slew of dividend-focused U.S. ETFs, is Principal Financial Group.

With earnings ahead later this month, a price breakout seen late last year, are there more gains ahead for this insurance stock? And what does the valuation look like? Let’s weigh the risks and possible upsides with the name.

High Dividend Factor: A 2022 Winner

According to Bank of America Global Research, Principal (NASDAQ:PFG) operates in four main areas: Retirement & Income Solutions (RIS), Asset Management (PGI), International, and U.S. Insurance. RIS delivers full-service accumulation, pension products, annuities, mutual funds, and other services to individuals and small-to-medium-sized businesses. PGI is a global asset manager. U.S. Insurance provides individual life and disability insurance and group life insurance. Lastly, the International business sells products in Latin America and Asia.

The Iowa-based $20.8 billion market cap Insurance industry company within the Financials sector trades at a low 4.1 trailing 12-month GAAP price-to-earnings ratio and pays a solid 3.0% dividend yield, according to The Wall Street Journal.

In December, analysts at Credit Suisse downgraded the stock on valuation, citing limited upside after a massive second-half rally. Barclays also reduced its expectations on PFG following the stock’s gain after beating earnings in October.

On valuation, analysts at BofA see earnings having fallen about 2% in 2022, an upward revision from before the firm’s Q3 report. Per-share profits are then expected to jump almost 10% in 2023 and more than 8% in 2024. The Bloomberg consensus forecast is less optimistic compared to BofA’s outlook. Dividends, meanwhile, are expected to increase commensurate with EPS.

The forward valuation multiples are in the low teens, about where PFG trades now, while the yield should be in the 3-4% range. With Financials sector stocks, I like to look at the price-to-book ratio, and it is high at 2.2 – well above the sector median of 1.2, so that’s not a good sign. Overall, shares are not overly cheap here despite solid EPS growth ahead.

Principal Financial: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q4 2022 earnings date of Monday, January 30, AMC with a conference call later that morning. You can listen live here. The volatility catalysts don’t end there, though, as the firm’s management team is expected to speak at the Credit Suisse 24th Annual Financials Services Forum 2023. Often at such industry conferences, key news is detailed that can move share prices.

Corporate Event Calendar

The Options Angle

Digging into the upcoming earnings report data from Option Research & Technology Services (ORATS) shows a consensus EPS forecast of $1.52 in the upcoming quarterly report. That would be an 18% decline from $1.85 earned in the same quarter a year ago. On the bullish side, though, is PFG’s strong earnings beat rate history with the last miss coming in October 2020. Shares have traded higher post-earnings in each of the past three quarters.

As for the expected stock price swing, PFG has relatively low implied volatility, under 30%, so the at-the-money straddle expiring soonest after the Q4 report reveals just a 3.7% swing priced in. With a pair of 7% share price increases after the last two earnings reports, I’d be a buyer of those cheap options here.

PFG: Cheap Options Ahead of Earnings

The Technical Take

Back in October, I flagged PFG as a breakout candidate with a price target to near $100. Shares indeed busted through key resistance near $80 and rallied nearly to my target. After peaking around $96 in November, shares have pulled back rather sharply to the mid-$80s, and I think a little more downside could be to come as shares pull back to retest the old resistance spot.

I’d look to scoop up shares in the low $80s with a stop in the mid $70s. Overall, though, I like how the stock has a bullish upward-sloping 200-day moving average with significant demand of shares, as measured by the volume by price indicator on the left-hand side of the chart, starting at $80. Overall, we are getting close to a favorable re-entry on PFG.

PFG: Shares Falling Into Support

The Bottom Line

The valuation is mixed to slightly expensive on PFG here, but share price momentum and trend suggest buying the stock in the low $80s could make sense. Long-term investors might still find better value elsewhere in the Financials space.