Prudential Dividend Play Now Looks Solid Enough


Dividends are a nice bonus with a stock, but with common stocks, the bigger part of the story is always going to be price movement. We need to be careful to enter at the right time.

Back on July 11, Barron’s ran an article on how nice Prudential’s 4% dividend was looking, and had some other positive things to say about the stock. Prudential was trading at a little over $100 at the time, and was up over 20% year to date and outperforming the market.

There was one little twist to this story that really wasn’t discussed, which was Prudential’s announcing its earnings on July 31, and a story behind that story that we needed to be aware of prior to being too eager to leap on this play.

What transpired with this stock illustrates very well how important it is to pay attention to the timings of our entries, even if we are investing long-term. If you were looking to buy Prudential stock in the summer of 2019, you might not think that where you entered would matter very much in 10 or 20 years, but it always does, and sometimes matters a lot.

20 years from now, no matter how well this play has done, or 10 years from now, or this time next year, buying your stock for around $80 instead of a little over $100 a share is going to matter, where you’ll either be ahead by almost $20 a share more or you won’t be. Pocketing the extra $20 a share, or an extra 20% return in this case, is clearly better.

It’s especially nice not to buy into a company and then see it drop 20% in the first few weeks of your holding it. Sometimes this just can’t be avoided, and we always risk this sort of thing when we enter a stock, but it’s often because we either don’t pay attention to such things or even care.

It actually requires at least some training as a trader to even have your eyes open to seeking a good entry, as investors have their sites firmly fixated on the horizon and don’t usually focus on what is in front of their eyes much at all.

With traders, since they are only planning on holding a stock for a short period of time, the quality of their entries is super important, and if you mess this up you will simply lose money on the trade. Traders do have the advantage of being ready to bail if things go south though, where investors are probably just going to stick with the mistake, so if anything, it’s even more important that investors time their entries right as they will be punished more for their mistakes.

To understand why entering this play in July was not such a good time to be doing it, we have to be familiar enough about what has generally been happening after an earnings announcement with Prudential. If there’s an earnings report coming right up, how long we want to hold the stock or how enamored we might be with their dividends does not preclude the need to do a little bit of research on it.

We Need to Make Sure We Do Our Homework When We Pick Stocks

Prudential has a habit of missing their earnings estimates, not by that much mind you, but these slight misses have been getting punished by the market, and you don’t want to be owning a stock that the chances of them getting punished again are too high.

Prudential had a streak of three of these quarterly misses in a row, and sure enough, July’s report made it four. The consensus on Wall Street was that they would report $3.23 per share, and the numbers only came in at $3.14. Not a big difference, but once again, the sellers piled n and drove Prudential’s stock price down.

We quickly saw Prudential’s stock go from a 20% gain year-to-date to actually going into the red for the year, breaking below the $80 per share mark. We were not only not beating the market this year, we were almost 20% behind it.

Entering ahead of an earnings report adds risk to our entries, but the risk is higher with some stocks, and with Prudential, this screamed for attention, if we bothered to look that is.

Another thing to note though is that this company is actually doing very well, and there’s no question that these slight earnings misses are a result of the action of traders and not investors, but traders play a big role in the day to day movements of stocks, and they turned against Prudential following this quarterly report as they have done in the past.

The fact that this all coincided with a market dip in August ended up amplifying things quite a bit, but as the pattern goes, they report their earnings, they miss by a bit, traders pound it down, and then it resumes its normal course. It actually becomes more of a bargain after all this action, and the smart money waits things out and when the dust settles, they jump on and things recover.

Just because this has happened before doesn’t mean it will continue to, but timing stock plays is all about the odds. The odds were not in our favor in July, but they are now, because we’re now in the phase where we may expect some more love to come our way and we want to be in stocks where the chances of love are higher than normal, instead of the chances of getting spanked being higher than normal as was the case in July.

We still want to be careful about picking our spots after a price run-down like this, but where the stock is sitting now, starting to recover, that’s the time to get ready to enter. We don’t want to be too eager to do this as we need to make sure that the selling pressure has really subsided, but we don’t want to wait too long either, missing out on a lot of the move because we’re just sitting there wanting it to show us more than it needs to.

It you liked Prudential at $101, you should like it even more at $82. If you like dividends, you will really like the yield on Prudential right now which is around 5% instead of the 4% that it was at in July. We, of course, would prefer this to be 4% and trade that 1% for a 20% gain in price, because, after all, 20% is a lot better than 1%.

Prudential Looks Like a Good Value Play Now

You don’t want to generally play bottoms like this, as often times a stock has taken a dive for reasons that should bother us, but there are times where a stock has pulled back but still looks good and the dip has been a result of its being oversold lately. Missing your earnings target by 9 cents a share should not cause your stock to drop by $20 a share as long as the outlook for the future remains good, which it does with Prudential.

This is what you call momentum, and a lot of academics misunderstand momentum, thinking that stocks are somehow magically priced according to their long-term value, but Prudential’s long-term value did not decline by 20% or decline in any way meaningful to the long term as a result of this earnings report.

Earnings are expected to remain above $3, and the company is still expected to make a lot of money, and overall the numbers look just fine for Prudential. Their paying out an extra $1 a quarter in dividends is a nice bonus, but it’s only a bonus really as its price moves a lot more than that in any given quarter so we need to keep our perspective and not put a disproportionate weighting on the dollar a quarter part.

Another important thing to note is that none of this has to do with how conservative an investor may be, where the thinking is that higher dividend stocks are naturally more suitable to the more conservative set, because the price volatility that a stock has does not discriminate here and everyone in the stock is subject to it, regardless of their investment goals and tolerances.

This is a nice place to enter though because we are right around the low of the past 52 weeks, which Prudential sunk to just like so many other stocks on Christmas Eve, and it had been over two years since it was this low, and back then this was on the way up. The fort was held this time, but this was really only a paper dragon after all so there’s no reason why it should not have held.

There’s always going to be paper dragons though and if we do want to hold a stock like this longer-term, we’re going to have to ride those out, and the market seems to be particularly scared of them with this stock, but Prudential does look quite solid at $82 and near the bottom end of this, the part that usually sees us recover quite a bit.

If we are indeed seeking higher dividend stocks, which Prudential clearly is, we need to pay particular attention to playing defense, meaning that we don’t want too much downside with the play because we’re a little more risk averse than your average investor.

This latest move last month with Prudential fits this bill perfectly, as before then we should have been worried that an earnings miss or anything else for that matter might send them downward to the $80 range.

There is no need to be scared of that anymore though, and Prudential is in an area where the downside is quite limited indeed barring a market collapse which places just about every stock in peril. That part is a constant though, whereas the particular downside of a stock isn’t, but Prudential is fitting the bill here very nicely now.

Where we enter always matters, and while a July entry would have been questionable and ultimately regrettable, things have changed a lot for the better since then for those who have had the patience to wait out this little storm.

Prudential was a nice long-term play in July, but it’s an even nicer one now, and if it indeed ends up recouping this 20% lost it’s just so much better to be up 20% than back up to flat, an amount that many investors would be happy to get as a return in 2 or 3 years.

It may not take anywhere near that long for Prudential to get back up there, provided that the market doesn’t send it tumbling that is, so this is both a nice potential swing trade and a solid longer-term investment down here. If getting a much higher dividend yield than average makes you happy, all the better.

Prudential calls themselves the rock, but even rocks need a firm foundation. Being more firmly planted into the ground as it is now and getting it at such a bargain is exactly what we want.



Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.